The Next Hurdle in your ERC Claim: Financial Reporting
October 20, 2021
At a glance:
- The main takeaway: Industry experts have recommended using the loss recovery model in response to widespread confusion about reporting the ERC in financial statements.
- Impact on your business: The loss recovery model means you can report ERC claims sooner and avoids any need to amend previous financial statements, but you must be certain in your ERC eligibility.
- Next steps: Businesses who have claimed or are preparing to claim the ERC for 2020 or 2021 need to give careful consideration to their eligibility before preparing any financial statements.
Struggling to navigate your ERC claim and financial reporting? Aprio can help.
The full story:
From determining your qualified wages to understanding your credit’s taxability, nothing about the Employee Retention Credit (ERC) is simple. The next hurdle eligible employers must face is the uncharted territory of reporting the ERC on your next financial statement.
Beyond the importance of satisfying regulatory compliance standards, your company’s quarterly and annual financial reports provide performance insights that help assess and forecast performance. Accuracy is essential but only obtainable through careful reporting that encompasses all factors affecting your company’s finances.
Accurately reporting the ERC is a uniquely challenging issue
While the ERC will undoubtedly impact financial performance, exactly how that impact should be reported is unclear. Extensive guidelines provided through the Financial Accounting Standards Board (FASB) explain how to satisfy financial reporting obligations; however, no such guidelines exist for reporting the ERC because the credit is so new.
The lack of official guidance on reporting the ERC in financial statements has generated extensive uncertainty among business owners and tax professionals. Some have taken the position that the ERC should be reported as an uncertain tax position, but this would signal uncertainty regarding the IRS’s acceptance of the credits and trigger a required disclosure. Others have suggested that the ERC be reported as an income tax position, but the fact patterns don’t fit the criteria outlined by FASB guidance.
Industry experts weigh in
In an attempt to clear the air, the Center for Plain English (CPEA) at the American Institute of Certified Public Accountants (AICPA) analyzed the FASB guidelines and issued an official recommendation that companies report the ERC using the loss recovery model.
Companies typically use the loss recovery model after experiencing a loss that may be recovered through avenues such as insurance claims. Under the loss recovery model, outlined in FASB ASC 410, companies recognize the claim for recovery “only when the claim is probable.” This requirement to report the claim when probable allows companies to report the recovery before actually receiving the funds – this circumvents any need to amend prior financial statements while allowing companies to reflect the recovery sooner.
Using the loss recovery model in practice
The CPEA believes – and Aprio agrees – that the ERC constitutes a recovery of wages previously paid to employees, as allowed by the specifics of the credit. Employers can report their ERC amounts in the financial statement immediately following their eligibility determination, regardless if the ERC is for a previous year or if the credit amount has been filed for or received. There is no need to amend 2020 financial statements to reflect an ERC claim.
The additional flexibility provided by the loss recovery model means employers should be very certain of their ERC eligibility before recording the amounts in the financial statements. It will be far more difficult to course-correct if you report the ERC in a financial statement and later determine you did not meet all the stringent eligibility requirements.
The bottom line
If you’re ready to leave the COVID-19 in the past, then reporting the ERC in your next financial statement is just the next step in your business’s recovery. However, you need to be certain in your eligibility before you can clear this next hurdle.
Aprio’s nationally recognized team of ERC advisors can give you the peace of mind you need to confidently claim, report, and defend your ERC claim. We can help you navigate the complex eligibility requirements and compile thorough documentation to mitigate your risk of improper financial reporting or inaccurately calculated ERC claims.
Schedule a consultation today and learn why our clients say we have the most thorough ERC documentation in the industry.
Disclaimer for services provided relative to SBA programs and the CARES Act
Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.
The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.
Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.
You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.
In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.
Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.
About the Author
Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.