Accounting and presentation of Provider Relief Funds when preparing GAAP financial statements.

As a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act) and the U.S. Department of Human and Health Services (“HHS”) establishing the Provider Relief Fund (“PRF”), there are several new considerations health care provider recipients of these funds must make when preparing financial statements this year. As most companies are preparing for year-end close, we wanted to discuss the accounting treatment for and presentation of PRF payments when preparing generally accepted accounting principles (“GAAP”) financial statements for both nongovernmental not-for-profit (“NFP”) entities and for-profit entities.

NFP health care entities—accounting treatment and presentation:

NFP entities will follow the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 958-605, Not-for-Profit Entities—Revenue Recognition. This standard would classify the PRF payments as a nonexchange transaction (or contribution) and would require an entity to determine if this contribution is conditional or unconditional. Because the PRF payments are required to be used for entities who have incurred health care related expenses or lost revenues that are attributable to COVID-19, and because noncompliance with the terms would result in HHS recouping some or all of the payments, the PRF payments would be considered conditional contributions under FASB ASC 958-605. As such, contribution revenue would be recognized only to the extent that health care related expenses or lost revenues have been incurred at the reporting date and only if those costs will not be reimbursed from other sources.

As there is no explicit guidance on the classification of these funds as reported in the income statement, the entity should follow reporting guidance for similar types of grants received by the entity. For instance, if the entity has other similar grants recorded in “Public Support” on the income statement, then these PRF payments should also be recorded within Public Support and disclosed separately in the footnotes to the financial statements. If there are no other similar type of grants received by the entity, then recording these funds as Other Operating Income would also be appropriate. Regarding the balance sheet, given the restrictions placed on these funds by the CARES Act, PRF payments would generally be considered donor-restricted. Since the recipient is required to meet conditions imposed by the CARES Act in order to keep the funds, then any funds received before year-end but have not been recognized as contribution revenue would be recorded as deferred revenue (liability) until the conditions are substantially met and at that time would be reclassified as net assets without donor restrictions.

For-profit healthcare entities—accounting treatment and presentation:

Because the scope of FASB ASC 958-605 mentioned above excludes the transfers of assets from governments to for-profit business entities, there is no explicit guidance within U.S. GAAP regarding the accounting for government grants to for-profit business entities. The AICPA, however, has observed three options that could be followed: International Accounting Standard (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance, FASB ASC 450-30, Contingencies—Gain Contingencies, orFASB ASC 958-605 (described above). The main difference between IAS 20, ASC 450-30, and ASC 958-605 relates to the timing of when the PRF payments could be recognized as revenue. With IAS 20, these payments could be recognized as revenue once there is reasonable assurance conditions will be met whereas ASC 450-30 and ASC 958-605 requires all contingencies related to receipt of the funds to be met before the revenue is recognized.

PRF payments recognized as revenue can be shown as Other Operating Income on the income statement, or under IAS 20, can be shown as a reduction to the related expense the funds are meant to cover. Initially PRF payments should be recorded as deferred revenue (liability) on the balance sheet until the proceeds are realizable. For-profit health care entities with material PRF payments should disclose its accounting policy for such payments and the impact to the financial statements.

The table below summarizes the applicable accounting guidance and appropriate financial statement presentation for these funds:

Entity Type Guidance Balance sheet presentation Income statement presentation Disclosure
Not-for-profit entity ASC 958-605 Distributions to be accounted for as donor-restricted refundable advances until the conditions of the grant are substantially met Revenue (separate from ASC 606 revenue) if the distributions are considered transactions that are part of ongoing central activities or gains if the funds are considered peripheral or incidental to the entity Description and amount of funds received
For-profit entity IAS 20, ASC 450-30,
or ASC 958-605
Distributions should be accounted for as refundable advances until there is reasonable assurance that the entity will comply with the conditions of the grant Distributions should be recognized in the income statement on a systematic and rational basis and presented as either:  a credit in the income statement (“other income”) or a reduction to the related expense Description and amount of funds received

If you have any questions related to Provider Relief Funds or other CARES Act provisions, please contact one of LBMC’s accounting and audit experts: Courtney Bach, Shareholder, cbach@lbmc.com, 615-309-2481; Michelle Schmidt, Senior Manager, mschmidt@lbmc.com, 615-309-2439