Challenging Times - Accounting and The CARES Act

As advisors, we are fielding a flood of questions from business owners, CFOs and controllers on how to account for benefits received under the various CARES Act programs.  While clarifying information on CARES Act benefits is being released by the US Department of the Treasury and Small Business Administration (SBA) on a continual ongoing basis, little is being communicated regarding financial reporting for those benefits.   Challenges lie ahead for companies, especially contractors, that do not invest the time to properly document and account for benefits received. The following steps are key for anyone responsible for financial reporting.

Step I - Documentation

The Paycheck Protection Program (PPP) generated a significant number of questions related to borrowers documenting their assessment of economic need and certification that a PPP loan was necessary. All loans issued under the PPP program are covered under the Freedom of Information Act and subject to review by the SBA.  All loans over $2m will be subject to SBA review following the lender’s submission of the borrower’s loan forgiveness application.  As a result, documentation of your assessment of economic need is essential.  We suggest the following best practice:

  • Documentation of the Company’s quantitative analysis supporting necessity for the loan.  Some common examples of quantitative factors include sources of liquidity, cash reserves, financial condition and trends of the underlying business, forecasts and projections, conversations with your customer base regarding discounts and extension of payment terms, potential prepayment of vendor invoices, changes in your customer base, delays in award or start date of contracts and liquidity of the owners. 

The Families First Coronavirus Response Act (FFCRA) has received less attention than the PPP but again, maintaining proper documentation is also essential.  The FFCRA includes two acts, one for payment of up to 2 weeks of emergency paid sick leave and one for up to 12 weeks of expanded family and medical leave (10 of which are paid). Employee eligibility and the related tax credit varies under each of the acts.  As a result, we suggest that companies use a checklist to document each individual employees’ situation so that documentation is sufficient to support any tax credits claimed under the FFCRA.  This documentation should be retained for a minimum of four years (regardless of whether leave was granted or denied) from the date the tax is due or paid, whichever is later.  Documentation should include (29 CFR§ 826.140):

  • Conditions under which the employee is eligible for paid leave;
  • Calculation support for the amount of paid sick leave and expanded family and medical leave (this piece is very important since payment amounts vary based on conditions under which the employee is eligible for payment);
  • Calculation support for the amount of qualified health plan expenses allocated to wages;
  • Copies of all 941s filed and any 7200 forms filed to claim credits;
  • Requests for leave from employees should be in writing and include a statement including the qualifying reason the employee is unable to work/telework and dates for which leave is requested. 
  • If requesting emergency paid sick leave, documentation should include the name of health care provider instructing the employee to self-quarantine/isolate. 
  • If requesting expanded family and medical leave, documentation should include the name of individual being cared for, their relationship to the employee, age, name of school/childcare provider that is unavailable and a statement that no other suitable person can care for the child.    

Step II – Accounting for benefits received   

The receipt of benefits received under the various provisions of the CARES Act creates unique challenges for contractors. Properly capturing benefits received is essential to properly calculating PPP loan forgiveness, management of indirect rates, accurate reporting of incurred costs and proper billing on government contracts and subcontracts. Clarification on the mechanics of such calculations is still pending, but it is expected that benefits received under the CARES Act will be reductions of costs billed under government contracts. Accounting processes for recording cash receipts and processing payroll should be updated to incorporate separate tracking of CARES Act benefits. Companies should also consider modifications to their chart of accounts to segregate receipt of PPP loan funds and tax credits received under the FFCRA. 

Step III – Accounting for contract costs  

As previously stated, contractors receiving benefits under the CARES Act face a unique challenge on how to account for contract costs when those costs are essentially being covered by benefits under the CARES Act. The expectation is that “double dipping” will not be allowed.  Companies should anticipate increased auditor scrutiny of costs incurred during 2020 as many companies are taking advantage of benefits provided by the CARES Act.  To date, we have not seen any indication that the incurred cost model (ICE) will be modified to account for CARES Act benefits. There is currently no guidance regarding the impact of the receipt of CARES Act benefits on fixed price contracts.   

Section 3610 of the CARES Act provides for discretionary reimbursement of leave costs on cost type contracts, through September 30, 2020, up to an average of 40 hours per week, at appropriate rates, for contractor employees or subcontractors who are unable to work at an approved government site due to shutdowns or quarantines and cannot telework because their job duties cannot be performed remotely.  It is essential that contractors maintain constant communication with Contracting Officers to obtain contract modifications as needed due to COVID-19 closures since modifications will be necessary to obtain funding for covered leave costs (Section 3610 modifications are not available for fixed price contracts).  Section 3610 creates additional challenges in accounting for contract costs and billing of flexibly priced contracts since costs funded by a section 3610 modification cannot be paid with PPP loan funds or generate tax credits under the FFCRA. Further, contractors will need to provide adequate support for claimed rates which includes appropriate overhead and general and administrative costs but excludes profit/fees. Note: draft guidance issued by the DOD on the process for reimbursement closed for public comment on May 22, 2020. 

Companies will need to segregate all costs paid with CARES Act benefits within their chart of accounts, by contract if necessary, in order to provide a sufficient audit trail, to properly quantify amounts that should not be billed to the government customer and to ensure that costs provided for by another CARES Act benefit are not also requested for reimbursement under Section 3610.

Contractors should continue to maintain cost pools and record costs based on the appropriate cost objectives, as they always have.

Contractors should also continue to monitor indirect rates and adjust provisional rates as appropriate. Billings should be adjusted for noted variances in actual vs provisional rates due to reductions in cost pools as a result of credits for benefits under the CARES Act.  Further, contractors should monitor contract performance and clearly identify changes in contract scope that are normal versus those related to COVID-19. Additional scrutiny is expected for contract modifications as the government customer will need to ensure that pre COVID-19 scope issues are not being pushed into COVID-19 related change orders.  

Step IV – Accounting for PPP loan forgiveness

Borrowers that receive forgiveness of PPP loans should create contra expense accounts to properly credit cost pools and bases for expenses paid for with forgiven PPP loan proceeds. The use of contra accounts will provide an efficient method for companies to quantify reductions in incurred costs for benefits received under the CARES Act, calculate actual rates for 2020, budget for 2021 and calculate provisional rates for 2021. 

Contract considerations

Additionally, contractors should review contracts for clauses that provide remedies for performance delays and document circumstances around the occurrence of delays. Delays can be caused by supply chain issues, employees requiring quarantine, closures of work locations, etc.  Keep in mind that while these clauses relieve penalties for delays, they do not provide funding for additional costs incurred as a result of delays.  As a result, capturing regular costs vs costs related to delays and monitoring of costs is critical. 

  • FAR clause 52.249-14 Excusable delays (cost reimbursement and T&M contracts) - a contractor would not be considered to be in default due to failure to perform if the failure arises from causes beyond the contractor’s control and without fault of or negligence of the contractor. 
  • FAR Clause 52.212-4(f) Excusable delays (commercial contracts) – contractor would not be liable for default if nonperformance is caused by an occurrence beyond the reasonable control of the contractor and without its fault or negligence, including acts of the government in either its sovereign or contractual capacity, epidemics, quarantine, and delays of common carriers.

 FAR Clauses 52.243-1 thru 52.243-7 should also be reviewed for options related to contract changes. 

Other CARES Act benefits

  • Employee Retention Credit (ERC) – 50% credit on up to $10,000 of wages paid or incurred between 3/13/2020 – 12/31/2020.  Credits received should be accounted for in contra accounts as offsets to wage expense. 
  • Payroll tax deferment – provides for deferral of the employer share of social security tax to be paid over the next two years (50% paid by 12/31/2021 and 50% paid by 12/31/2022). A liability should be recorded for all deferred amounts and payroll tax expense should be recorded as fringe expense as incurred. 


The advisory team at Wall, Einhorn & Chernitzer continues to monitor legislative changes and updates related to COVID-19. For questions or clarification on any of the suggestions included above, contact WEC’s Government Contracting Advisory Team