On November 2, 2020, the Ohio Bureau of Workers’ Compensation (BWC) board approved a third dividend to Ohio businesses to provide continued financial support through the COVID-19 pandemic. The dividend, totaling $5 billion, is provided to eligible employers based on their billed premiums for the policy period of July 1, 2019, to June 30, 2020. The BWC began sending payments to eligible recipients in mid-December.
However, some businesses were not receiving their payments until early 2021. While these funds are a great help to many Ohio employers, the timing of the payments raises questions on the proper timing of recognition for accounting purposes.
Substance Over Form
When determining the proper account treatment for a transaction, we look at its substance over its form. While the BWC refers to the payment as a ‘dividend,’ the BWC is not an investment security or other equity investment held by the recipients, so we do not believe the term drives the accounting determination. Instead, in substance, there are a few accounting treatments that would be considered:
- Recovery of a Loss accounting
- Gain Contingency accounting
- Government Grant accounting
Determining Applicable Accounting Models
While there are no accounting standards that explicitly address the nature of the BWC ‘dividends,’ it is our opinion that the recovery of a loss accounting model is the most applicable. In coming to this conclusion, we note that the ‘dividend’ was approved in November, four months after the end of the policy year driving eligibility and the payment amount.
The retroactive nature of this program results in employers having paid their premiums with no expectation at the time that the expenses would be recovered. Further, while there are arguments to use either the gain contingency or government grant models, the fact that this program is based on a reimbursement of expenses, in our opinion, results in the recovery of a loss model being the better fit.
Loss Recovery Treatment
The Recovery of a Loss model in US GAAP is driven by specific guidance for environmental liabilities (FASB ASC 410-30-25). However, in practice, it has been applied to other loss recoveries by analogy. Under the loss recovery guidance, the recognition requirement is to recognize the recovery, or in this case, the BWC ‘dividend’ when the recovery is ‘probable.’
We note that the BWC dividend was authorized on November 2, 2020, and the eligibility and amount of the dividend to be received by an employer is likely readily determinable under the program’s rules. As a result, in most cases, it would likely be concluded that the recovery was ‘probable’ before December 31, 2020, and the ‘dividend’ would be recognized. The timing would not be contingent on the timing of the receipt of the payment.
Under the loss recovery treatment, we feel it is reasonable to present the recognized amount as either ‘other income’ or as a reduction to the associated expenses being recovered.
Tapping into Timing
Although we feel the loss recovery model is the most applicable, in most instances relative to this program, we feel that the timing for recognition will be similar to the timing under the Gain Contingency Model (FASB ASC 450-30 – Recognition is based on being realized or realizable) or under the Government Grant Model (FASB ASC 958-605 – Recognition is based on the conditions of the program being substantially met).
Get more information on the BWC dividend from the BWC website.
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