Editors’ Note: The CPA Journal staff would like to acknowledge the recent passing of longtime column editor, author, and Editorial Advisory Board member Howard Levy. His column below is being published posthumously. A valuable and vocal contributor to The CPA Journal and NYSSCPA, he devoted his professional life to serving the public interest.

This author was asked to advise a practitioner as to my views on the proper accounting and related auditing and reporting issues regarding two government reimbursement grants, pursuant to which qualifying expenditures were made by a not-for-profit client during a prior audit year, but for which billings for the reimbursement claims remained unsubmitted and substantially past due under the grant requirements due to what was clearly a material weakness in internal control.

The salient terms of both grants were identical and provided that reports, together with invoices for reimbursement requests for qualified expenditures, be submitted with suitable supporting documentary evidence within 30 days of completion of all grant-covered services and be subject to approval (and possible audit) by the grantor agency.

Accounting Considerations

A reimbursement grant is almost universally classified as a conditional contribution and, accordingly, unrecognized (but disclosed, similar to a contingent asset) until all grant recognition conditions have been met (generally when qualified grant expenditures are made). Although it is possible to view timely billing as such a condition required by the grant document, I prefer to consider only the making of qualified expenditures as the “conditions” necessary for recognition of grant reimbursements as contribution revenue similar to a performance obligation, as would be the case had ASC 606 been applicable to contributions. I believe it is more consistent with the economic substance of the circumstances described above—and therefore preferable—to treat the failure to bill timely for the grant reimbursement not as a contribution recognition condition, but rather as a credit loss; this results in recognizing the grant as contribution income for qualified grant expenditures when made and a bad debt expense for the estimated uncollectible portion, most commonly after the billing deadline has passed. Once the degree of uncertainty about collectability after the deadline passes (which tends to increase over time) becomes such that the estimated uncollectible portion—and therefore, the required allowance—becomes 100%, the effect on the reported change in net assets would, of course, be the same under either recognition alternative interpretation described above.

In this case, because of the uncertainty as to pending acceptance and approval of the billing by the grantor, collectability necessarily became more susceptible to estimation by management. Because the estimated uncollectible portion would not relate to either unexpended reimbursable amounts or, as it might for an exchange transaction, to cash payments received in advance of delivery of goods or services, the full contribution income should be recognized, and the related balance sheet credit should not be recorded as either “contract liabilities” (as is provided in ASC 606 for exchange transactions, but not for contributions) or as any acceptable alternative liability classification such as “deferred revenue.” If the required allowance is 100% of the gross asset, it need not be grossed up in the balance sheet, but note disclosure is recommended even if the gross asset is only borderline material. If such required allowance is less than 100% of the gross asset, the asset should appear in the balance sheet net of a disclosed contra-asset (i.e., an “allowance” similarly to what is ordinarily associated with a billed receivable), with “bad debts” recorded as an offsetting expense.

It is, of course, both permissible and common for unbilled revenue to be recorded and carried as a receivable or similar asset in the balance sheet net at its estimated probable (generally viewed as >50%) collectible value, providing—in the case of reimbursement grants—that management has adequate evidential support for its belief that they represent qualified expenditures (i.e., that all the applicable conditions for recognition have been met by the grantee). Typically, however, estimating uncollectability can be significantly more challenging for unbilled amounts than it is for billed receivables.

It should be noted that under the circumstances described here, the unbilled asset technically should not be referred to as a “receivable,” because a reimbursement grant request is virtually always subject to review or audit and acceptance by the grantor of the supporting documentation submitted. Until that acceptance happens, I prefer the term “unbilled grant reimbursements” (or “unbilled grant reimbursement claims”). However, if the net recorded unbilled amounts are judged to be not material, I believe it would not be misleading—and, therefore, would be acceptable—to include them with grant reimbursement claims receivable that have been billed and accepted by the grantor but are as yet unpaid. Likewise, it would not be correct to use the ASC 606 term “contract asset,” which would be appropriate for a grant classified as an exchange transaction but not for a contribution.

In the event of a 100% allowance for uncollectability, a sample disclosure might read as follows:

The Organization has an unbilled grant reimbursement claim of $XXXXXX that is subject to a 100% allowance since once submitted, it will be substantially at risk of disallowance by the Grantor primarily due to untimely submission. Accordingly, management is unable to estimate the extent to which, if any, it may nevertheless be collectible.


Auditing and Reporting Considerations

It is clear that serious consideration should be given to reporting the failure to bill for grant reimbursement when due as attributable to a material internal control weakness for financial reporting purposes which, of course, would be the case without regard to the actual quantitative materiality of the exceptions observed when the potential of the weakness could have resulted in a material loss to the organization.

The two principal financial auditing challenges are obtaining adequate assurance as to whether: 1) the expenditures for which reimbursement is claimed are qualified for reimbursement under the grant terms, and 2) management’s estimate of the probability of collection and the necessary allowance is reliable. As for the latter, I recommended starting with a discussion with someone of sufficient authority at the grantor to make a reasonable assessment of the probability of its acceptance of a submission for reimbursement at such a late date. If the response warranted it, I advised that I would also make an independent assessment of the probability of disallowance of any significant amount of submitted costs. (Of course, to be able to evaluate that, unless already adequately done in the prior audit, an auditor would have to examine enough supporting evidence, including—but not necessarily limited to—whatever will be or has been submitted to the grantor.)

In assessing collectability, an auditor might wish to enquire of the grantor whether the funding for the grant has yet been received from the donor who agreed provide it and whether such funds are still available; or, if not, whether the grantor is reasonably assured that the funds are still likely to become available to pass through to the grantee.

Lastly, if the control deficiency that had been observed was with regard to a grant for a federally funded program subject to audit for Single Audit Act purposes, the finding would probably likewise need to be reported as attributable to a compliance control deficiency. Depending upon the circumstances, there might be Single Audit Act audit and reporting implications of this matter if applicable to the prior year as well.

Howard B. Levy, CPA is an independent technical consultant based in Las Vegas, Nev. He is a member of The CPA Journal’s Editorial Advisory Board and the author of The Volunteer Treasurer’s Handbook: Financial Management Building Blocks for Not-for-Profit Organizations.