The Employee Retention Credit (ERC) program, created under the CARES Act, provides eligible employers with per-employee credits based on qualified wages and health insurance benefits paid. This program was designed to help companies that have been adversely affected by COVID-19 to retain their employees. But what is the appropriate accounting treatment for this refundable credit?The Financial Accounting Standards Board (FASB) has detailed instructions that describe how to include the employee retention credit in financial statements. However, the AICPA has not published a technical question and answer (TQA) on ERCs, as it did with PPP loans and grants for indoor operators.
Therefore, it is important to understand the details of the ERC program and the accounting technique used to properly reflect the credit in financial statements.If an entity follows IAS 20, it has the option of declaring the employee retention credit as income or net of qualifying costs. If an entity used IAS 20 or ASC 958 to account for its PPP loans, it is supposed to use the same advice to submit reports to its ERC. Others have recommended declaring the ERC as a tax position on income, however, the factual patterns do not meet the standards of the FASB guide.The ERC is recorded as a debit to cash or accounts receivable and as a credit to income from contributions or grants, according to the schedule indicated above. In the event that an organization receives advance payments from the ERC, cash will be charged and a refundable advance obligation will be credited.By applying IAS 20, for-profit entities do not recognize the ERC until the reasonable guarantee threshold related to the terms of the ERC and the receipt of credit is met.
If the conditions have not been substantially met by the end of the financial statement year and the entity has received the ERC as an advance, it will record a liability for the cash received until the conditions for obtaining the ERC are substantially met.A for-profit organization would recognize the ERC as income from grants or other income if the requirements are met; while a NFP entity is required to declare the ERC as income. If your bank has been able to use the ERC, it is important to understand how to properly account for this refundable credit.Disaster loan counselors can help your business with understanding and navigating through this complex and confusing employee retention credit (ERC) and employee retention tax credit (ERTC) program. The presentation will address all details of this program and where amounts should be included in financial statements.