Financial assistance provided through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the American Rescue Plan Act (ARPA) offered necessary support for many organizations during the pandemic. The influx of resources made available to state, local, territorial, and Tribal governments brought with it the continued need for sound accounting practices and financial reporting for grants.
Now is a good time to evaluate and improve your financial reporting process for grants. While grants are subject to many reporting requirements, we will focus on revenue recognition under accounting principles generally accepted in the United States of America (GAAP) and the schedule of expenditures of federal awards, as required by Uniform Guidance.
Financial reporting in accordance with GAAP
In June 2020, the Governmental Accounting Standards Board (GASB) issued Technical Bulletin No. 2020-1, Accounting and Financial Reporting Issues Related to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Coronavirus Diseases (TB 2020-1). TB 2020-1 helps governments navigate the complexities of accounting for CARES Act funding. It addresses issues such as the type of financial assistance, characterization of loss of revenue, and effect of amendments. While ARPA funds have their own complexities, the principles established in TB 2020-1 for the CARES Act translate well to ARPA, and GASB has not published further guidance for ARPA.
In TB 2020-1, GASB provides guidance that the Coronavirus Relief Fund (CRF) resources are voluntary nonexchange transactions subject to eligibility requirements. The Local Fiscal Recovery Funds in ARPA are like the CRF resources in the CARES Act and should be treated consistently. This means the award should be recognized in the period when all applicable eligibility requirements are met.
When evaluating revenue recognition for voluntary nonexchange revenues, remember that the recipient cannot incur allowable costs until there is an executed grant agreement. For the ARPA funds, this means the recipient has signed all the required documents accepting grant terms and conditions, and that the recipient has received confirmation of the award before the end of its reporting period.
The presumed applicable period is the immediate provider’s fiscal year and begins on the first day of that year, based on the provider’s appropriation to disburse the resources. For the CARES Act, few cities met the threshold for directly awarded metropolitan cities, which subjected them to the state’s provisions rather than as a direct recipient of the federal government. For example, California cities and counties that received pass-through awards from the State of California were unable to recognize grant revenue in fiscal year ended June 30, 2020, because the State of California did not make the appropriations available to governments until July 1, 2020, through passage of its budget act.
The ARPA funds, which were directly distributed to a considerably greater number of recipients, were appropriated immediately by the federal government upon signing ARPA into law. That means the direct recipients of ARPA funds and the non-entitlement units of governments that received their allocations from states that executed the awards before the end of the reporting period, may recognize revenue immediately upon execution of the award, if they met the eligibility criteria.
For those governments that received cash before the end of the reporting period, a liability should be reported for the portion of financial assistance that was not recognized as revenue. For those governments that did not receive cash before the end of the reporting period, a receivable should be reported for the portion of financial assistance that was recognized as revenue.
The possibility of a single audit
While many governments require an annual single audit due to the amount of federal awards received each year, many others are below the threshold for requiring a single audit. Funding related to COVID-19 resources may push more governments over that $750,000 threshold.
For governments unfamiliar with single audits, it is important to prepare. Taking inventory and reading the guidance provided by the Office of Management and Budget (OMB) and awarding federal agencies will help you understand and equip yourself to submit (and pass) a single audit.
What is the SEFA?
The schedule of expenditures of federal awards (SEFA) acts as a supplemental schedule to the financial statements that an organization produces when it is subject to a single audit requirement. This requirement is triggered when the federal expenditures reported on the SEFA exceed $750,000 or more over the organization’s fiscal year
Preparing the SEFA is no small task. It must be completed in accordance with the Uniform Guidance and include all federal expenditures. In addition to determining the amount of federal expenditures, the Uniform Guidance specifies how the amounts are to be reported. Individual federal programs should be listed by federal agencies, and pass-through entities should be noted as well.
The single audit and ARPA
On March 19, 2021, the OMB released a memo that detailed single audit updates to be aware of in ARPA. The updates give awarding agencies the discretion and the authority to grant some exceptions to recipients who are affected by the pandemic if they are permissible by law. These entities do not necessarily have to be recipients of COVID-19 related financial assistance to receive these exceptions.
The most notable update is the extension of the single audit submission due date. For those recipients who did not file their single audits with the Federal Audit Clearinghouse by March 19, 2021, and had fiscal year-ends through June 30, 2021, the submission of their reporting packages was extended to six months past the normal due date, and no action by the awarding agencies or recipients is necessary. However, the documentation showing the reason for the delay in filing must be retained.
Additional updates include:
- Awarding agencies may allow some necessary incurred pre-award costs.
- Awarding agencies may allow extensions of awards, which gives recipients more time to resume projects and expend the funds.
- Prior approval requirements may be waived.
- Awarding agencies can grant recipients up to a three-month extension beyond the normal due date to submit financial, performance, and other required reports.
- The award application deadlines can be flexible.
While it is clear the OMB is attempting to be reasonably flexible, maintaining clear documentation of your grants and expenditures will be helpful as new and changing guidance becomes available.
Understand the current requirements and look for changes
The pandemic threw many organizations into survival mode. However, with federal, state, and local support many have weathered the financial difficulties over the past 18 months as well as can be expected. As organizations move forward, they will have to account for how they survived, where the monetary support came from, and where the money went. The near future will require unprecedented diligence, flexibility, and perhaps most of all, patience.
MGO is here to help
Guidance over grant funding, especially as it relates to CARES Act and ARPA programs, are continuing to develop and evolve. It’s important to stay on top of the latest changes and updates, as utilization of these resources are critical to the financial recovery of your organization and the proper reporting of those resources to stakeholders and the federal agencies charged with oversight. If you need personalized guidance, don’t hesitate to reach out to your MGO contacts.