This summer, many eligible live performing arts organization operators; live venue operators or promoters; theatrical producers; motion picture theater operators; talent representatives; and museum, zoo, and aquarium operators who met specific criteria received notification from the Small Business Association (SBA) that they would be receiving a Shuttered Venue Operators Grant (SVOG) award and potentially a supplemental grant as well. This article will cover the revenue recognition and federal compliance (Single Audit) requirements for these SVOG awards.
Determining Revenue Recognition for SVOG
Now that your entity has received the award, the next step is to determine the proper revenue recognition. The relevant guidance for this type of cost reimbursement federal award falls under U.S. GAAP ASU 2018-08, Clarifying Guidance for Contributions Received and Contributions Made (Topic 958-605). This standard recognizes contributions received by a not-for-profit (NFP) entity. The associated barrier to entitlement (condition) is the requirement to only spend the grant funds on allowable costs, as defined by the legislation and the Uniform Guidance. As a result, the initial step upon receipt of the award is to record deferred revenue, then to recognize revenue as the allowable costs are incurred. However, no revenue should be recorded any earlier than the date of the Notice of Award.
The following examples will assist in determining when your entity should record revenue:
Revenue Recognition Example 1:
- NFP client with 6/30/2021 year-end receives a Notice of Award of an SVOG grant of $2 million dated 6/29/2021.
- The NFP will a) use $500,000 of expenses incurred during March 2020 through June 2021, and then b) the remaining $1.5 million on expenses to be incurred July 2021 through December 2021.
- Given the fact pattern, the client will record revenue as follows: a) the $500,000 of past expenses will trigger revenue recognized of $500,000 in June 2021 (while the expenses were incurred prior to June 2021, revenue cannot be recognized any earlier than the date of the Notice of Award); and b) the remaining $1.5 million of expenses will trigger revenue recognition in each month those expenses are incurred.
- The result is that the NFP records $500,000 of SVOG grant revenue in FY2021 and $1.5 million of SVOG grant revenue in FY2022.
Revenue Recognition Example 2:
- Same fact pattern as Example 1, except the Notice of Award is dated 7/2/2021.
- Given the fact pattern, the client will record revenue as follows: a) the $500,000 of past expenses will trigger revenue recognized of $500,000 in July 2021 (while the expenses were incurred prior to July 2021, revenue cannot be recognized any earlier than the date of the Notice of Award); and b) the remaining $1.5 million of expenses will trigger revenue recognition in each month those expenses are incurred.
- The result is that the NFP records all $2 million of the SVOG grant revenue in FY2022.
Determining if a Single Audit is Required and Next Steps
Beyond revenue recognition, those entities expending $750,000 of federal funds during the entity’s fiscal or calendar year are also required to have a federal compliance audit (commonly referred to as the Single Audit). When determining if your entity met this threshold, it is important to analyze all federal funding received by the entity. It is possible that the SVOG award may be less than the $750,000 threshold, but when combined with other federal awards, the entity may have met or exceeded the threshold.
A Single Audit is an audit of the entity’s compliance with U.S. government compliance requirements associated with the federal award received by the entity. The auditors will select a major program for testing both the entity’s compliance and the entity’s controls over compliance. The auditor follows a prescribed testing approach as outlined in the Uniform Guidance (2 CFR 200) and the related Compliance Supplement. The Single Audit may be performed by your current audit firm if they meet the competency requirements in Government Auditing Standards.
The audit is due the earlier of 30 days after report issuance or nine months after fiscal year end. The results will be uploaded to the Federal Audit Clearinghouse and are publicly available. The upload package includes the Single Audit Report and the audited financials. Audits for periods ending on or before 6/30/2021 also have an automatic six months COVID extension on the due date.
Preparing the Schedule of Expenditure of Federal Awards for the Single Audit
The first step of a Single Audit is the preparation of Schedule of Expenditure of Federal Awards (SEFA) by the entity, this financial statement will include the entity’s SVOG award, and any other federal awards received by the entity during the entity’s fiscal year.
Using the fact patterns found in the revenue recognition examples earlier in the article, let’s see how the entity’s costs translate to the SEFA.
SEFA Example 1:
- This NFP will prepare its annual SEFAs using the amounts of revenue recognized. Accordingly, the FY2021 SEFA will report $500,000 for the SVOG and the FY2022 SEFA will report $1.5 million for the SVOG.
- Assuming this NFP has no other federal awards, a Single Audit will only be required for FY2022.
SEFA Example 2:
- This NFP will prepare its annual SEFAs using the amounts of revenue recognized. Accordingly, the FY2021 SEFA will report $0 for the SVOG and the FY2022 SEFA will report $2.0 million for the SVOG.
- Assuming this NFP has no other federal awards, a Single Audit will only be required for FY2022.
Testing Allowable Costs for the Single Audit
As part of the Single Audit, the auditors will test the entity’s costs charged to the award to determine if the costs were allowable as defined by the Uniform Guidance. Allowable costs are:
- Limited to the cost categories in the legislation
- Exclude any costs that are specifically disallowed by the Uniform Guidance
- Payroll costs that comply with the Uniform Guidance Section 200.430
- Costs for procured goods and services that comply with the Uniform Guidance Sections 200.318-200.326
- Costs incurred during the project period (March 1, 2020 through December 31, 2021) and paid for by the end of the budget period (one year from date of grant). Or through June 30, 2022, if the entity received a supplemental grant.
- Exclude any costs claimed toward another federal cost-reimbursement grant or contract (such as Coronavirus Relief Fund), or forgiveness of a Payroll Protection Program loan, or Employee Retention Tax Credits (no “double dipping”). IRS Notice 2021-49, issued on August 4, 2021, clarifies that the “no double dipping” rule for ERTC and SVOG only applies to wages for third and fourth quarters of 2021. The same wages may be used for both ERTC and SVOG for 2020 and the first and second quarters of 2021. Please consult with your CPA firm on how the guidance in IRS Notice 2021-49 applies to your organization. Read more about double dipping opportunities here.
More specifically, allowable cost categories included in the legislation are:
- Scheduled mortgage payments (not pre-payments)
- Scheduled debt payments, not including prepayment of principal on any indebtedness incurred in the ordinary course of business prior to February 15, 2020),
- Workers protection costs
- Payment to independent contractors ($100,000/employee limit, not to exceed $100,000 in annual compensation for an individual employee of an independent contractor)
- Other ordinary and necessary business expenses, including maintenance costs
- Administrative costs (including fees and licensing)
- State and local taxes and fees
- Operating leases in effect as of February 15, 2020
- Insurance payments
- Advertising, production transportation, and capital expenditures related to producing a theatrical or live performing arts production. (May not be primary use of funds.)
Grantees may not use the SVOG award funds to purchase real estate; make payments on loans originated after February 15, 2020; make investments or loans; make contributions or other payments to or on behalf of political parties, committees, or candidates for election; or pay for other uses prohibited by the administrator.
* The Uniform Guidance (2 CFR 200.442) states that the costs of fundraising, including payroll, are not allowable unless the grantee obtains prior written approval from the awarding agency. As of the writing of this article, a question has been submitted to the SBA asking if fundraising payroll and other costs may be applied to the SVOG grants. SVOG grantees are encouraged to consult with their auditors and other advisors as to the allowability of fundraising payroll and other costs.
Payroll Costs Documentation for the Single Audit
Payroll costs must be supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable, and properly allocated. These costs should:
- Be incorporated into the official records of the non-federal entity.
- Reasonably reflect the total activity for which the employee is compensated by the non-federal entity, not exceeding 100% of compensated activities (for IHE, this per the IHE’s definition of IBS);
- Encompass federally assisted and all other activities compensated by the non-federal entity on an integrated basis, but may include the use of subsidiary records as defined in the non-federal entity’s written policy;
- Comply with the established accounting policies and practices of the non-federal entity; and
- Support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one federal award; a federal award and non-federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity.
Working with Procurement Standards for the Single Audit
Some non-payroll costs are also subject to compliance with procurement standards. Costs not subject to procurement standards include rent, utility payments, scheduled mortgage or debt payments, state and local taxes and fees, operating leases in effect as of February 15, 2020, and insurance payments.
Costs typically subject to procurement standards include worker protection expenditures; payments to independent contractors; some administrative costs; and some advertising, production transportation, and capital expenditures related to producing a theatrical or live performing arts production. If any of these costs are in excess of the micro purchase threshold ($10,000), then there are prescribed methods for procurement at specified levels such as sealed bid, competitive, and noncompetitive proposal. Please see Clark Nuber’s OMB Uniform Guidance on Administrative Requirements – Update for Procurement Standards article for more detail on these types of procurements.
For purchases below the $10,000 threshold, the purchase may be awarded without competition if the entity determines the price to be reasonable. When determining if the entity has any purchases in excess of the micro purchase threshold, keep in mind the threshold applies to the aggregate of purchases from each vender, not an individual invoice or purchase order.
Following Up on Your SVOG
SVOG awards offered a vital monetary lifeline to venues during this unprecedented time in our economy. Now, it’s important to get the accounting of those funds correct. If you have any questions regarding how to recognize revenue, how to navigate a Single Audit, or anything else related to the SVOG you received, please reach out to a Clark Nuber professional.
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