• A financial statement audit evaluates whether a company’s financials are fairly presented in accordance with applicable accounting standards. An integrated audit also includes an assessment of internal controls over financial reporting.

• Common audit mistakes include late or missing provided-by-client (“PBC”) requested submissions, insufficient or unreliable documentation that hinders effective risk assessment, weak internal and IT controls, and errors in applying accounting standards.

• Preparing early, understanding the internal control environment, and training staff can help your company provide relevant and reliable information, which is critical for assessing audit risk and demonstrating compliance with applicable laws and regulations.

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Financial statement audits are a critical checkpoint for companies, stakeholders, and investors. While the process has its limitations, the goal of an audit is to provide reasonable assurance that the company’s financial statements are free of material misstatement (whether due to error or fraud).

However, the audit process is only as effective as the broader environment supporting it — including timely and reliable financial information, a well-resourced accounting function, effective oversight by the board or audit committee, and a clear understanding of the entity’s operations and the regulatory landscape of its industry.

Many organizations approach audit season underprepared or unaware of the common pitfalls and complex or nontraditional transactions that can delay the process, increase costs, or raise compliance concerns.

In this article, we explain the financial statement audit process, common mistakes we see companies make during external audits, and best practices that lay the foundation for a smoother audit experience.

Understanding Financial Audits

During a financial statement audit, an independent registered public accounting firm follows generally accepted auditing standards (GAAS) and assesses your company’s financial records, transactions, and reporting processes. Independent auditors gather and evaluate relevant and reliable evidence to determine whether the financial statements are presented fairly — following generally accepted accounting principles (GAAP), international financial reporting standards (IFRS), or another applicable financial reporting framework.

The process typically follows these phases:

1. Audit planning and risk assessment: External auditors work closely with company management to understand the operations of the business, identify significant risk areas, and develop an audit strategy that is unique to the organization.

2. Internal control evaluation: The auditor assesses the design and operating effectiveness of internal controls over financial reporting, often through walkthroughs and targeted testing of key controls. The results of this evaluation directly inform the auditor’s risk assessment and the nature, timing, and extent of substantive audit procedures. In an integrated audit, this process also includes gathering information to develop an opinion on the effectiveness of internal controls. Auditors pay particular attention to information technology general controls (ITGCs), which are foundational to the reliability of automated processes and system-generated reports. If the auditors identify material weaknesses, they may need to disclose them in the financial statement footnotes or the auditor’s report (depending on the severity and context).

3. Substantive testing: The auditor gathers evidence by examining transactions, account balances, and disclosures through sampling, confirmations, and recalculations. Strong internal controls impact the audit team’s risk assessment and may allow the team to reduce the amount of substantive testing required.

4. Conclusion and reporting: The auditor drafts the opinion letter, communicating findings to management and those charged with governance.

10 Common Types of Mistakes Made in Public Audits

Despite best intentions, many organizations encounter issues during the annual audit that delay timelines, increase costs, or raise red flags. Here’s a look at some common mistakes and why they matter:

1. Inadequate Documentation of Internal Controls

Many companies fail to maintain sufficient documentation around their internal control procedures. This lack of documentation makes it difficult for auditors to understand and — if necessary — test the design, implementation, and effectiveness of key controls. As a result, auditors may need to perform additional walkthroughs or expand their substantive testing — potentially increasing audit costs and timelines.

For publicly traded companies, this issue can have additional implications under Section 404 of the Sarbanes-Oxley Act (SOX). Section 404(a) requires management to assess and report on the effectiveness of internal control over financial reporting (ICFR). Section 404(b) requires the independent auditor to attest to and report on management’s assessment for accelerated filers.

If the auditors deem internal controls ineffective, management must disclose material weaknesses in its annual filing with the SEC. This can affect investor confidence, internal resource allocation, and external perceptions of the company’s governance. These findings may also place added pressure on the accounting team to remediate deficiencies under tight deadlines while still managing the financial close and reporting cycle.

2. Late or Incomplete Audit PBC Requests

Prior to audit fieldwork, the audit team sends a “provided by client” (PBC) list to management outlining the documents and financial data auditors need. Submitting incomplete or delayed items stalls fieldwork and may increase audit fees.

3. Improper Revenue Recognition

Misapplying Accounting Standards Codification (“ASC”) 606 or lacking support for revenue transactions — including cutoff periods around year-end — is a recurring audit issue. Companies often struggle to identify and document performance obligations in their contracts with customers and allocate the transaction price appropriately among those obligations.

These issues are especially common in arrangements involving bundled products or services, where the timing and pattern of revenue recognition may differ by deliverable. Inadequate documentation or inconsistent application of these principles can lead to audit adjustments or the need for expanded testing.

4. Weak IT General Controls

Deficiencies in ITGCs — such as user access management, change management, physical security of IT systems, intrusion detection, and system backup and recovery processes — can compromise the integrity of financial reporting systems and result in control deficiencies or audit findings. Increasingly, cybersecurity risk is also a critical area of concern, particularly as companies face heightened exposure to data breaches and unauthorized access.

In cases where companies outsource key processes or use cloud-based platforms that affect financial reporting, it’s important to obtain and evaluate SOC 1 Type 2 reports from service providers. These reports help assess whether the third party’s control environment supports reliable financial reporting. Failing to obtain or properly review these reports can result in audit scope limitations or the need for additional procedures.

5. Errors in Lease Accounting

ASC Topic 842  introduced significant changes to lease accounting — increasing complexity in how companies identify, measure, and disclose lease arrangements. Common mistakes include misclassifying leases, failing to identify embedded leases in service or supply agreements, and incorrectly applying accounting treatment for lease modifications and remeasurement events.

Errors can also arise in calculating the right-of-use asset and lease liability, selecting the appropriate discount rate, and preparing the required footnote disclosures. These issues can lead to material misstatements and require substantial audit follow-up — especially when a company maintains a large or decentralized lease portfolio.

6. Inaccurate or Unsupported Estimates

Many key areas in financial reporting rely on management’s judgment, especially when it comes to technical estimates such as goodwill impairment, valuation of long-lived assets, fair value of debt or equity instruments, and contingent liabilities. These estimates require a disciplined process of identifying the appropriate valuation method, documenting key assumptions, and evaluating both supporting and contradictory information.

Errors often arise when companies fail to update assumptions based on current market conditions, skip critical steps in the impairment testing process, or use inconsistent inputs across related estimates. A lack of documentation or transparency around the basis of these estimates raises audit concerns and can result in restatements or material weaknesses in internal controls over financial reporting.

7. Failure to Perform Timely Reconciliations

Account reconciliations help ensure accuracy and reliability in financial statements by comparing information in your financial records with third-party support — such as bank statements or loan documents. Delayed or inconsistent reconciliations of bank accounts, intercompany balances, and key general ledger accounts can indicate larger issues with the financial close process.

8. Insufficient Segregation of Duties

In smaller or rapidly growing companies, it’s common for individuals to handle multiple steps within a transaction cycle — such as initiating, approving, and recording transactions. This increases the risk of errors and intentional misstatements.

A lack of proper segregation of duties introduces risk at the process level and signals broader weaknesses in the company’s control environment (a key component of internal control frameworks). When auditors identify these gaps, they may reduce their reliance on controls and expand the scope of substantive testing — increasing the time and resources required for the audit and potentially causing delays.

Strengthening segregation of duties supports the integrity of financial reporting and reinforces a culture of accountability.

9. Poor Communication Between Financial Reporting and Operational Teams

A disconnect between accounting and other departments — including operations, legal, and procurement — can result in incomplete or misclassified transactions and missed disclosures. This issue is especially common in areas like inventory management, project accounting, and deferred revenue recognition.

It can also impact the identification and disclosure of related party transactions, legal contingencies, and other matters that require input from departments outside of finance. For example, if legal teams do not communicate the existence of pending or threatened litigation, the accounting team may fail to properly record or disclose a loss contingency — resulting in audit findings or misstatements. Clear, documented communication channels between departments are critical for complete and accurate financial reporting.

10. Lack of Readiness for New Accounting Standards

Companies often underestimate the effort required to adopt new standards — such as those related to segment disclosures (ASU 2023-07), income tax disclosures (ASU 2023-09), and business combinations (ASU 2023-05). Late-stage implementation leads to rushed adjustments and audit stress.

Fortunately, many of these issues are avoidable through proper preparation, communication, documentation, and adherence to regulations.

How to Prepare for a Smoother Audit Season

Here are a few best practices to reduce audit risks and improve efficiency in the financial statement reporting process:

• Start early: Preparing for the year-end audit should begin months in advance. Develop and assign internal timelines for PBC deliverables, reconciliations, and close procedures.

• Assess and document internal controls: Clearly document your control procedures. Perform regular controls testing throughout the year and update them to reflect changes in processes or personnel at year-end.

• Invest in training: Your accounting and finance teams should stay current on new standards and audit requirements to reduce the risk of misapplication.

• Leverage technology thoughtfully: Use financial close and compliance tools to streamline workflows, manage documentation, and maintain audit trails.

• Conduct a pre-audit walkthrough: Reviewing key areas of risk, estimates, and controls ahead of time enables your company to address issues before auditors arrive.

• Foster collaboration: Create open channels of communication between auditors, internal accounting functions, IT, operational departments, and the audit committee to minimize misalignment. Collaboration between external auditors and the internal audit team can also be beneficial. However, under the Public Company Accounting Oversight Board’s new QC 1000 standards, internal auditors are considered “other participants” in the audit, which may affect how their work is evaluated and used. Companies should understand the implications of this designation and ensure internal audit activities are properly documented and aligned with audit objectives.

Be Proactive to Prevent Audit Mistakes Before They Happen

A successful audit is more than a compliance milestone. It’s a sign of sound corporate governance. By recognizing common mistakes and addressing them proactively, you can support more accurate and timely financial statements, reduce audit fatigue in your team, and build trust with stakeholders and regulators.

How MGO Can Help

Our Audit and Assurance team supports public companies through every stage of the audit lifecycle — from preparing internal controls documentation to navigating complex accounting standards and responding to auditor inquiries. Our professionals bring deep industry experience to help clients identify risks and streamline financial reporting processes. If you’re approaching audit season or facing challenges with audit readiness, reach out for guidance tailored to your specific needs.

The post 10 Common Public Audit Mistakes That Could Delay Your Timeline appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Financial statements offer insight into a company’s operations, performance, and position.

• There are four main types of financial statements — balance sheet, income statement, cash flow statement, and equity statement — and each serves a unique purpose.

• Interpreting financial statements requires an understanding of basic accounting principles and financial ratios.

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Understanding financial statements is a fundamental skill for business owners, investors, and anyone who wants to make informed financial decisions about a company or organization. These reports provide an overview of an entity’s financial health and help stakeholders measure profitability, liquidity, cash flow, and long-term viability.

Whether you’re running a small business or deciding where to invest, knowing how to read and analyze financial statements can help you evaluate performance and make smarter choices. This guide covers the essential components of financial statements and how to interpret them.

What Is a Financial Statement?

Financial statements are standardized reports that provide a snapshot of an entity’s financial position, performance, and cash flows. They offer insight into how the company generates revenue, spends money, and manages its resources.

Several different stakeholders use financial statements — including business owners and executives, investors and lenders, government agencies, employees and unions, and financial analysts and advisors.

There are several methods for preparing financial statements. In the United States, most large companies follow Generally Accepted Accounting Principles (GAAP), while large companies in other countries follow International Financial Reporting Standards (IFRS).

For smaller companies, GAAP and IFRS may be overly complex and expensive to implement and maintain. Fortunately, there are simpler alternatives. These are known as “other comprehensive basis of accounting“, or OCBOA.

OCBOA includes:

• Cash or modified cash basis

• Income tax basis

• Regulatory basis

Types of Financial Statements

There are four primary types of financial statements, each serving a distinct purpose. Let’s look at each of these four statements in more detail:

Balance Sheet

The balance sheet, also known as “the statement of financial position”, provides a summary of a company’s financial position at a specific point in time. It follows the fundamental accounting equation:

Assets = Liabilities + Equity

Assets are the things a company owns — including cash, inventory, and property. Liabilities are what it owes to others — including accounts payable and loans. Equity is the value belonging to the company’s owners after subtracting the book value of liabilities from assets.

A healthy balance sheet demonstrates strong liquidity, indicating the ability to meet short-term obligations and manage debt.

Income Statement

The income statement is also called a profit and loss statement (P&L). It shows the company’s revenues and expenses over a specific period — typically monthly, quarterly, or annually. The basic formula of the income statement is:

Net Income = Revenue – Expenses

This financial statement highlights the revenue a company earns, expenses like cost of goods sold (COGS) and operating expenses, and shows the company’s net income or net loss.

This report helps assess profitability and performance over time.

Cash Flow Statement

The cash flow statement tracks the inflow and outflow of cash in three main areas:

1. Operating activities: Cash from sales and payments to suppliers

2. Investing activities: Buying equipment, selling assets

3. Financing activities: Taking out loans, repaying debt

Unlike the income statement, which can include non-cash items like depreciation, the cash flow statement focuses solely on cash coming into and going out of the business. Understanding the amount of cash on hand can help you assess liquidity and solvency.

Statement of Changes in Equity

The statement of changes in equity (also known as the statement of owners’ equity or statement of shareholders’ equity) explains changes in the company’s equity over a reporting period.

The general formula for this financial statement is:

Beginning Equity + Net Income – Dividends +/- Other Changes = Ending Equity

While people tend to overlook the statement of changes in equity, it provides valuable insights into how the company retains or distributes profits.

How to Read Financial Statements

Reading financial statements effectively means looking beyond the numbers. Here’s a step-by-step breakdown of how to read these reports:

Step 1: Start with the Income Statement

The income statement is often the best starting point because it shows how much money the company brought in and how much it spent over a given period.

Begin by looking at total revenue. Has it grown or declined compared to previous periods? Next, review the major expense categories — including cost of goods sold (COGS), operating expenses, and interest. See how they impact profitability.

Net income, located at the bottom of the statement, indicates whether the business ended the period in the black (i.e., it generated a profit) or in the red (i.e., it incurred a loss).

For additional insight, calculate profitability margins — like gross margin or net profit margin — to understand how efficiently the company converts revenue into profit.

Step 2: Review the Balance Sheet

Next, take a look at the balance sheet — which offers a snapshot of assets, liabilities, and equity at a specific point in time.

Begin by examining current assets and current liabilities to assess the company’s liquidity. Does the company have enough resources to cover short-term obligations? Next, look at long-term liabilities and total equity to understand the business’s capital structure.

A strong balance sheet has a healthy ratio of assets to liabilities, manageable debt levels, and a solid base of retained earnings or shareholder equity.

Step 3: Analyze the Cash Flow Statement

The cash flow statement shows how cash actually moves through the business — critical information for assessing liquidity and solvency.

Focus first on cash from operating activities. Ideally, it should be positive and sufficient to sustain day-to-day operations. Next, review cash from investing activities to understand how the company allocates cash for growth — such as purchasing equipment or investing in new ventures. Finally, consider financing activities to know how the business manages debt, issues stock, or pays dividends.

Even profitable companies can face financial trouble if their cash flow is weak.

Step 4: Review the Statement of Changes in Equity

For the statement of changes in equity, look at how different equity accounts changed over the accounting period. Did equity grow from net income or did the owners have to contribute more capital or issue additional stock to make ends meet?

Does the company keep profits in retained earnings, or pay them out to owners in the form of dividend distributions? Tracking changes in retained earnings reveals whether the business is reinvesting profits or returning value to shareholders.

Step 5: Use Ratios for Deeper Insight

After reviewing the individual statements, use financial ratios to compare performance over time or against industry benchmarks.

Some useful financial ratios include:

• Current Ratio = Current Assets / Current Liabilities (measures liquidity)

• Debt-to-Equity Ratio = Total Liabilities / Shareholder Equity (measures how leveraged the company is)

• Net Profit Margin = Net Income / Revenue (measures profitability)

Compare these ratios across periods and against industry benchmarks. You can find benchmarks for your industry through industry associations or peer networks, online resources such as BizStats, or by consulting with an advisor.

How MGO Can Help

Whether you’re leading a business, evaluating stock market investments, or managing your personal finances, understanding financial statements helps you make more informed financial decisions.

However, compiling and interpreting the numbers isn’t always straightforward. That’s where MGO comes in. Our professionals work closely with business owners and leaders to prepare financial statements and interpret the financial data in context. We can help you connect the dots between reporting and real-world decisions.

If you’re ready to get more from your financial statements or just need help making sense of what you’re seeing, reach out to our team today.

The post Understanding Financial Statements: The Complete Guide for Businesses and Individuals appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Effective cost management involves proper inventory costing methods, accurate accounting of tasting room operations, and appropriate financial reporting practices.

• Wineries of different sizes face unique challenges, from implementing GAAP-based inventory costing for small wineries to comprehensive risk management strategies for large wineries.

• Understanding production costs, distribution expenses, and potential risks helps wineries make informed financial decisions and achieve sustainable growth.

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As a winery owner, mastering cost management is crucial for profitability. Understanding your expenditures and employing the right strategies can improve your financial health and boost your operational efficiency.

Whether you are a small, medium, or large winery, here are some key factors to keep in mind:

Inventory Costing Methods

For small wineries — which make up 49% of the market — U.S. generally accepted accounting principles (GAAP) inventory costing methods are invaluable. These methods enable you to assign a monetary value to your inventory, providing the exact cost data capture you need to manage production and distribution expenses effectively. If you are a medium-sized (or larger) winery, you can benefit from more comprehensive financial models and robust accounting systems.

Tasting Room Operations

For wineries of all sizes, accurately accounting for tasting room activities is critical. This includes tracking your inventory, managing sample losses, and accounting for both owner and employee samples. Proper financial controls and expense categorization will provide you clear insights into profitability. Understanding these challenges, you should consider comprehensive solutions like inventory costing, financial modeling, and tax preparation to enhance your operational efficiency and profitability.

Audit Versus Review

As your winery grows, the need for independent Certified Public Accountant (CPA) audits or reviews becomes more important. This decision hinges on the level of assurance needed and the specific needs of lenders, investors, or creditors. While audits offer the highest level of assurance and can enhance credibility with stakeholders, they are also more costly. Reviews, on the other hand, are less expensive but provide more limited assurance. Tailored audit and review services can help meet the unique requirements of your winery, supporting accuracy and compliance in financial reporting.

Tax Return Considerations

Proper inventory valuation and tracking of production activities are essential for correct tax preparation. Formal inventory valuation methods — such as those adhering to U.S. GAAP — can aid in exact tax reporting and provide a reliable template for management. This appropriately accounts for all production costs, helping to minimize tax liabilities and avoid potential issues with tax authorities. Specialized tax preparation services tailored to the unique needs of your winery can help you meet compliance requirements and improve financial outcomes.

Small Wineries: Accurate Inventory Accounting

If your winery produces fewer than 1,000 cases annually and lacks extensive accounting resources, you may choose to keep books on a tax basis. However, implementing U.S. GAAP-based inventory costing — even if not needed — can offer valuable insights into your production costs and help you secure debt or equity financing. Accurate cost tracking allows you to make informed decisions about your operational efficiency and financial management, giving you a competitive edge in the crowded market.

Medium Wineries: Proactive Risk Management

For medium-sized wineries, effective risk management is crucial to safeguarding financial stability. Finding potential risks such as climate impacts or market fluctuations requires a proactive approach, including investing in insurance and strategic planning. Although these measures involve upfront costs, they can prevent substantial financial losses overall. Implementing robust risk management practices will help your winery keep consistent production quality and protect your financial health against unforeseen challenges, ultimately supporting sustainable growth and operational resilience.

Large Wineries: Strategic Risk Mitigation

Large wineries, with extensive operations and market reach, face significant risks from climate change and volatile market conditions. Investing in comprehensive risk management strategies, including climate-resilient infrastructure, diversified revenue streams, and market analysis tools, is essential. Upfront costs for insurance and strategic planning are necessary to mitigate these risks. By addressing potential vulnerabilities proactively, your winery can protect its substantial investments, maintain market stability, and set the table for long-term profitability despite external uncertainties. This approach will help you preserve your reputation and sustain growth in a competitive industry.

Distribution and Growth Considerations

For small wineries, distributing wine introduces challenges that require a clear understanding of both production and distribution costs. Increased production often involves significant investments in equipment and facilities, affecting the cost per case until production volumes grow sufficiently. Before entering any distribution channel, it is crucial to understand the full cost of production, develop a solid pricing strategy, and account for the costs involved in various sales channels to support profitability and growth.

Elevate Your Winery’s Profit Potential

Effective cost management is vital for wineries of all sizes to navigate the complexities of the market and achieve sustainable growth. By implementing robust financial practices, correct cost tracking, and comprehensive risk management strategies, your winery can enhance its operational efficiency and profitability.

How MGO Can Help

MGO’s tailored solutions can help you meet these challenges and thrive in this competitive industry. Reach out to our Vineyards and Wineries team today to learn how we can support you.

The post How to Master Cost Management for Your Winery appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• There is still uncertainty about how to account for the refundable Employee Retention Credit in your books, because you can’t account for it the same way you can account for the Paycheck Protection Program loan.
• The standards you can choose from are FASB ASC 958-605, International Accounting Standard (IAS) 20, FASB ASC 450-30, and FASB ASC 832.
• Depending on the standard you choose, you might have to consider the timing of recognition, the presentation of a grant income line, and financial ratios.

The Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC) were powerful economic stimulus programs instituted during the COVID-19 pandemic to provide financial relief to struggling businesses. Both programs were the first initiatives of their kind, and as a result, there remains some uncertainty about what standards apply when accounting for them in your financial statements and records. 

If you’re wondering how to distinguish the two, as well as determine the standard you should be utilizing, Angel Naval, a leader in our Client Accounting Solutions practice, breaks it down.  

The PPP versus the ERC

Created to aid businesses facing financial challenges through the pandemic, there are several key differences between the PPP and the ERC.  

The PPP is a loan and was created for small businesses with less than 500 employees in mind, giving them the funds needed to cover payroll and other eligible expenses. This includes hiring back employees who were laid off and covering applicable overhead. The loans are forgiven if the proper criteria are met (I.e., maintaining payroll and keeping consistent employee numbers).  

A subset of the PPP loan, the ERC is a refundable tax credit that allows businesses to reduce their tax liability based on the qualified wages they’ve paid to their employees during the pandemic. It was created for businesses of all sizes to capitalize on in order to avoid layoffs. They can claim up to $5,000 per employee in 2020 and $7,000 per employee per quarter in 2021.  

Determining the appropriate accounting standard for ERCs 

If you took advantage of the ERC, currently, there is no straightforward way of accounting for it. Put simply, the ERC is a gray area because it’s so new, and there isn’t a straightforward way of accounting for it. Plus, ERCs are payroll credits, not income tax credits — and while FASB has extensive guidance for accounting for income taxes in ASC 740, it doesn’t for payroll taxes. Even the American Institute of Certified Public Accountants (AICPA) has suggested different standards, so it’s up to you to apply your best judgement based on the facts and circumstances of your business. Some things to consider:  

• The timing of recognition, 
• The financial ratios important to you, and 
• Whether you want to present a grant income line. 

For income statement presentation, according to AICPA’s December 2022 report, more public entities are crediting the associated expense rather than recognizing the amounts on a separate line item.  

For example, you may think you can account for the ERC the same way you can for the PPP, but you can’t. As we differentiated above, the PPP is a loan and the ERC is a payroll credit, therefore the PPP is subject to debt and liability standards and the ERC is not. While the PPP did come first, those companies that have paid payroll taxes but still qualified for the ERC are still able to retroactively claim the credit.  

For prospective applications, for-profit entities can adhere to guidance in one of the following. 

FASB ASC 958-605 

If you’re applying the revenue recognition model under ASC 958-605, ERCs are treated as conditional contributions. In this case, companies must have met the program’s eligibility conditions to record revenue (and no amounts can be recorded until all criteria are evaluated and “substantially” met according to regulations). Given the conditions are met, a refund receivable and income should be recognized in the period the entity determines the conditions have been substantially met. This standard requires that gross revenue be recorded, and it doesn’t permit any netting of revenue against related expenses.  

Some barriers to meeting ASC 958-605’s requirements include the eligibility requirements, like meeting the rules for a decline in gross receipts as well as incurring qualifying expenses (i.e., payroll costs). To file for the ERC, you’ll need to decide whether preparing the related ERC form and filing it with the government presents a barrier you’ll need to overcome. Note administrative and other small stipulations do not represent a barrier. 

IAS 20 

If you’re applying IAS 20, you can’t recognize the ERC until the “reasonable assurance” threshold is met in correlation with ERC’s conditions and receiving the credit. In this case, “reasonable assurance” translates to “probable” under GAAP standards and is easier to satisfy than “substantially met” in Subtopic 958-605. Once you’ve provided reasonable assurance that conditions will be met, the earnings impact of the government grants is recorded over the periods in which you recognize as expenses the related costs that the grants are intended to cover. So, you’ll need to estimate the amount of the credit you expect to keep. 

IAS 20 allows you to record and present either the gross amount as other income or net the credit against other related payroll expenses. For every quarter that a company meets the recognition criteria, it records a receivable and either other income or net expense.  

FASB ASC 450-30 

If you’re interested in applying FASB ASC 450-30, please note amounts related to the ERC wouldn’t be recognized under this model until all uncertainties regarding the disposition of the credit are resolved — and there’s less detail on the disclosure, measurement, and recognition requirements as compared to the other standard models. For this reason, the AICPA doesn’t believe this model to be a preferred accounting policy for the ERC. 

FASB ASC 832 

If you’re applying this model, you must disclose several specifics about transactions with a government within its scope. These entail the nature of the transactions, which includes a description of the transactions as well as the form in which it has been received, whether it’s cash or other assets. You must also detail the accounting policies you used to account for the transactions. Any line items on the balance sheet and income statement that are affected by the transactions must be accounted for too — plus, the amounts applicable to each financial statement line item in the current reporting period.  

How MGO can help 

While there are clear accounting standards for the PPP, there is still some uncertainty surrounding the ERC. Depending on the standard you choose, you may have to consider the timing of recognition, financial ratios, and whether to present a grant income line. Therefore, businesses need to apply their best judgment based on the facts and circumstances of their business when accounting for ERCs. Our Client Accounting Solutions team has extensive experience helping clients navigate complex tax regulations post-pandemic. Contact us to learn more about which standard you should be using for federal relief programs. 

About the author 

Angel Naval oversees our West Coast Financial Advisory Services practice and provides value-added guidance for your corporate finance, financial planning, and business process needs. 

The post How to Account for the ERTC Correctly appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Now is a good time to evaluate and improve your financial reporting process for grants. While grants are subject to many reporting requirements, we will focus on revenue recognition under generally accepted accounting principles (GAAP) in the United States of America and the schedule of expenditures of federal awards, as required by Uniform Guidance.

Financial Reporting in Accordance with GAAP

In June 2020, the Governmental Accounting Standards Board (GASB) issued Technical Bulletin No. 2020-1, Accounting and Financial Reporting Issues Related to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Coronavirus Diseases (TB 2020-1). TB 2020-1 helps governments navigate the complexities of accounting for CARES Act funding. It addresses issues such as the type of financial assistance, characterization of loss of revenue, and effect of amendments. While ARPA funds have their own complexities, the principles established in TB 2020-1 for the CARES Act translate well to ARPA, and GASB has not published further guidance for ARPA.

In TB 2020-1, GASB provides guidance that the Coronavirus Relief Fund (CRF) resources are voluntary nonexchange transactions subject to eligibility requirements. The Local Fiscal Recovery Funds in ARPA are like the CRF resources in the CARES Act and should be treated consistently. This means the award should be recognized in the period when all applicable eligibility requirements are met.

When evaluating revenue recognition for voluntary nonexchange revenues, remember that the recipient cannot incur allowable costs until there is an executed grant agreement. For the ARPA funds, this means the recipient has signed all the required documents accepting grant terms and conditions, and that the recipient has received confirmation of the award before the end of its reporting period.

The presumed applicable period is the immediate provider’s fiscal year and begins on the first day of that year, based on the provider’s appropriation to disburse the resources. For the CARES Act, few cities met the threshold for directly awarded metropolitan cities, which subjected them to the state’s provisions rather than as a direct recipient of the federal government. For example, California cities and counties that received pass-through awards from the State of California were unable to recognize grant revenue in fiscal year ended June 30, 2020, because the State of California did not make the appropriations available to governments until July 1, 2020, through passage of its budget act.

The ARPA funds, which were directly distributed to a considerably greater number of recipients, were appropriated immediately by the federal government upon signing ARPA into law. That means the direct recipients of ARPA funds and the non-entitlement units of governments that received their allocations from states that executed the awards before the end of the reporting period, may recognize revenue immediately upon execution of the award, if they met the eligibility criteria.

For those governments that received cash before the end of the reporting period, a liability should be reported for the portion of financial assistance that was not recognized as revenue. For those governments that did not receive cash before the end of the reporting period, a receivable should be reported for the portion of financial assistance that was recognized as revenue.

The Possibility of a Single Audit

While many governments require an annual single audit due to the amount of federal awards received each year, many others are below the threshold for requiring a single audit. Funding related to COVID-19 resources may push more governments over that $750,000 threshold.

For governments unfamiliar with single audits, it is important to prepare. Taking inventory and reading the guidance provided by the Office of Management and Budget (OMB) and awarding federal agencies will help you understand and equip yourself to submit (and pass) a single audit.

What Is the SEFA?

The schedule of expenditures of federal awards (SEFA) acts as a supplemental schedule to the financial statements that an organization produces when it is subject to a single audit requirement. This requirement is triggered when the federal expenditures reported on the SEFA exceed $750,000 or more over the organization’s fiscal year

Preparing the SEFA is no small task. It must be completed in accordance with the Uniform Guidance and include all federal expenditures. In addition to determining the amount of federal expenditures, the Uniform Guidance specifies how the amounts are to be reported. Individual federal programs should be listed by federal agencies, and pass-through entities should be noted as well.

The Single Audit and ARPA

On March 19, 2021, the OMB released a memo that detailed single audit updates to be aware of in ARPA. The updates give awarding agencies the discretion and the authority to grant some exceptions to recipients who are affected by the pandemic if they are permissible by law. These entities do not necessarily have to be recipients of COVID-19 related financial assistance to receive these exceptions.

The most notable update is the extension of the single audit submission due date. For those recipients who did not file their single audits with the Federal Audit Clearinghouse by March 19, 2021, and had fiscal year-ends through June 30, 2021, the submission of their reporting packages was extended to six months past the normal due date, and no action by the awarding agencies or recipients is necessary. However, the documentation showing the reason for the delay in filing must be retained.

Additional updates include:

• Awarding agencies may allow some necessary incurred pre-award costs.
• Awarding agencies may allow extensions of awards, which gives recipients more time to resume projects and expend the funds.
• Prior approval requirements may be waived.
• Awarding agencies can grant recipients up to a three-month extension beyond the normal due date to submit financial, performance, and other required reports.
• The award application deadlines can be flexible.

While it is clear the OMB is attempting to be reasonably flexible, maintaining clear documentation of your grants and expenditures will be helpful as new and changing guidance becomes available.

Understand the Current Requirements and Look for Changes

The pandemic threw many organizations into survival mode. However, with federal, state, and local support many have weathered the financial difficulties over the past 18 months as well as can be expected. As organizations move forward, they will have to account for how they survived, where the monetary support came from, and where the money went. The near future will require unprecedented diligence, flexibility, and perhaps most of all, patience.

MGO Is Here to Help

Guidance over grant funding, especially as it relates to CARES Act and ARPA programs, are continuing to develop and evolve. It’s important to stay on top of the latest changes and updates, as utilization of these resources are critical to the financial recovery of your organization and the proper reporting of those resources to stakeholders and the federal agencies charged with oversight. If you need personalized guidance, don’t hesitate to reach out to your MGO contacts.

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