Whose Rules Rule? When Federal Funding and GAAP Revenue Recognition Collide.

• Author: Levine, Michele Mark
• Position: ACCOUNTING

Many governments received federal funding through the Coronavirus State and Local Fiscal Recovery Funds [CSLFRF], a grant program established by the American Rescue Plan Act of 2021 [ARPA], The amounts, timing, and methods of distribution of CSLFRF funds were unusual, and large grants went to some governments that had limited experience with federal awards. Even among governments that are frequent recipients of federal grants, there is some confusion because large tranches of CSLFRF cash were distributed to governments not only before the eligible expenditures were made, which is itself unusual, but even before the eligible expenditures were clearly identified! (1)

Unfortunately, because of this confusion, GFOA has begun to see cases in which governments have erroneously recognized CSLFRF advances as revenue in annual comprehensive financial reports submitted to our Certificate of Achievement for Excellence in Financial Reporting award program. So, in this article we'll review some of the relevant generally accepted accounting principles [GAAP], CSLFRF Final Rule provisions, and applicable portions of the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards [Uniform Guidance] with regard to grant revenue and expenditure recognition applicable to CSLFRF grants. (2) The aim is to identify and explain differences among the timing of [1] cash receipts and disbursements; [2] grant revenue and expenditure recognition in financial statements prepared in accordance with generally accepted accounting principles [GAAP]; and [3] grant expenditure recognition on the schedule of expenditures of federal awards [SEFA] that is the basis of federal fund single audits.

Key aspects of the CSLFRF Final Rule indicate that it is an expenditure driven grant program, as are most federal grants, because the eligibility requirements include incurring eligible expenditures. (3) Simply receiving CSLFRF funds does not trigger revenue recognition in accordance with GAAP. Unlike purpose restrictions, which do not affect the timing of revenue recognition, (4) revenue from expenditure-driven grants cannot be recognized until eligible expenditures have been incurred and identified, and any other eligibility requirements have been met. (5) CSLFRF funds that are received before eligible expenditures are made and identified as such constitute cash advances and should be reported as assets [restricted cash] and liabilities [unearned...