As many companies are taking advantage of the Employee Retention Credit (ERC), questions have been raised as to how the ERC should be accounted for. Because the ERC is not an income tax-based credit, it does not fall under Accounting Standard Codification (ASC) 740, Income Taxes. Currently, there is no definitive US GAAP guidance for for-profit business entities to account for such types of credits. As such, companies may account for it by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, under International Financial Reporting Standards (IFRS). Other applicable guidance that can be applied by analogy includes ASC 958-605 for contributions received by not-for profits or ASC 450, Contingencies. A not-for-profit entity that receives a government grant should apply ASC 958-605, Not-for-Profit Entities – Revenue Recognition.
Before selecting a policy, it is important to consider the accounting policy elected for the Paycheck Protection Program (PPP) loan forgiveness; whereas, there was an option to account for the loan as debt (under existing debt accounting guidance) or a government grant (by analogy to IAS 20). For those companies electing accounting treatment by analogy to IAS 20, a further option was provided in terms of presentation within the statement of income (generally as other income or netting with the corresponding expense). If you elected a policy to treat your PPP loan forgiveness under the government grant model, you will need to continue with this accounting policy and present your ERC as either other income or net expense on your income statement based on such prior election.
Most companies, however, elected to treat their PPP loans as debt under ASC 470, Debt. As such, it is recommended that companies account for their ERC under IAS 20 which allows for the ERC to be presented either as a reduction of payroll expenses or as a component of other income within the income statement.
It is important to note that the ERC should not be recorded until it is deemed probable, meaning it is probable that wages qualify for the ERC and the entity has complied with all conditions to realize the ERC.
Once deemed probable, the entity should record the following:
Credit Payroll Expense or Other Income
For income tax purposes, the ERC will be recorded as a reduction of payroll expense, thus reducing your payroll expense deduction and increasing your taxable income.
To learn about the key elements of the ERC, click here. If you have questions, please contact your GBQ advisor and see the ERC section of our COVID-19 Resources webpage.
Article written by:
Dustin Minton, CPA, MBA
Director, Assurance & Business Advisory Services