November 1, 2020
By Ken Tysiac
The coronavirus pandemic has led to numerous financial reporting challenges for CPAs that didn't seem to have easy answers in U.S. GAAP.
Although the foundational rules for U.S. financial reporting were designed to be applied across a wide range of occurrences, it would have been difficult for any standard setter to envision the number of lease concessions caused by the pandemic or the intricacies and often-changing rules associated with Paycheck Protection Program (PPP) loans.
Through various means that have included FASB staff Q&As, AICPA Technical Questions and Answers, and a GASB technical bulletin, standard setters and experts have developed guidance designed to help CPAs and others navigate the accounting challenges posed by the pandemic. In some cases, effective dates were changed as well (see the sidebar, "Virus Leads to Effective Date Changes").
As the fiscal year end approaches for companies that are on a calendar-year reporting schedule, here are answers to some of the year's most challenging pandemic-related financial reporting questions. (Unless otherwise noted, the text refers to for-profit and not-for-profit entities.)
A FASB staff Q&A stated that for lease concessions related to the effects of the pandemic, it is not necessary for a lessor or lessee to analyze each contract to determine whether enforceable rights and obligations exist in the contract. Therefore, the lessor or lessee can elect to apply or not to apply the lease modification guidance in FASB ASC Topic 842, Leases, and Topic 840, Leases, to those contracts. This election is available for pandemic-related concessions that don't result in a substantial increase in the rights of the lessor or the obligations of the lessee.
When a deferral affects the timing of the contract but the amount of the consideration is substantially the same, FASB's staff expects there will be multiple ways to account for those deferrals, none of which the staff believes are preferable to the others. Those methods include:
- Accounting for the concessions as if no changes to the lease contract were made. In that case, a lessor would increase its lease receivable, and a lessee would increase its accounts payable as receivables/payments accrue. In its income statement, a lessor would continue to recognize income, and a lessee would continue to recognize expense during the deferral period.
- Accounting for the deferred payments as variable lease payments.
FASB's staff explained that an entity is not required to choose the same election for all of its lease concessions related to the effects of the pandemic. In other words, some lease concessions may be accounted for as if the enforceable rights and obligations to those concessions existed in the original contract, while other lease concessions may be accounted for in accordance with the lease modification guidance in Topics 842 and 840. But the staff cautioned that Topic 842 should be applied consistently to leases with similar characteristics and in similar circumstances, in accordance with Paragraph 842-10-10-1.
The FASB staff also stated that lessors should provide disclosures about material concessions granted and that lessees should disclose material concessions received. The accounting effects of those disclosures should also be disclosed, FASB's staff said. More information is available at fasb.org.
PPP BORROWER ACCOUNTING
Nongovernmental entities may account for a PPP loan as a financial liability in accordance with Topic 470, Debt, and accrue interest in accordance with the interest method under Subtopic 835-30, according to AICPA Technical Question and Answer Section 3200.18.
The TQA addresses accounting for nongovernmental entities only, which include business entities and not-for-profit entities (NFPs).
The TQA explains that an entity accounting for the PPP loan under Topic 470:
- Would initially record the cash inflow from the PPP loan as a financial liability and would accrue interest in accordance with the interest method under Subtopic 835-30.
- Would not impute additional interest at a market rate.
- Would continue to record the proceeds from the loan as a liability until either (1) the loan is partly or wholly forgiven and the debtor has been legally released or (2) the debtor pays off the loan.
- Would reduce the liability by the amount forgiven and record a gain on extinguishment once the loan is partly or wholly forgiven and legal release is received.
According to the TQA, if a nongovernmental entity that is not an NFP (that is, it is a business entity) expects to meet the PPP's eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may analogize to International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, to account for the PPP loan. An entity accounting by analogy to IAS 20 would not be able to recognize government assistance until there is reasonable assurance that any conditions attached to the assistance will be met and the assistance will be received.
Once there is reasonable assurance that the conditions will be met, the earnings impact of the government grants would be recorded on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.
The TQA also states that in situations in which the PPP's eligibility and loan forgiveness criteria are expected to be met:
- A business entity can also analogize to the guidance in Subtopic 958-605 or Subtopic 450-30.
- An NFP should account for such PPP loans in accordance with Subtopic 958-605 as a conditional contribution.
More information is available at aicpa.org.
Lenders have encountered numerous issues as a result of the financial upheaval caused by the pandemic. In a series of TQAs, the AICPA provided advice on the following issues:
Loan restructurings resulting in periods with reduced payments
When a loan is restructured by a creditor, and the restructured loan is neither a troubled debt restructuring nor required to be accounted for as a new loan, a creditor should determine a new effective interest rate in accordance with the interest method, as described in Subtopic 310-20. More information is available at aicpa.org.
Accounting for the forgivable portion of a PPP loan
The AICPA believes that payments received from the U.S. Small Business Administration (SBA) should be accounted for similarly to payments received from the borrower. When full or partial payment is received from the borrower or the SBA before the loan matures, amounts received should be accounted for as a prepayment. More information is available at aicpa.org.
Classification of advances under the PPP
An advance under the PPP should be accounted for as a loan. More information is available for this topic and the next two at aicpa.org.
Consideration of SBA guarantee under the PPP
SBA guarantees would be considered as embedded guarantees for all lenders. For lenders that have adopted FASB's new credit losses standard, ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the guarantee from the SBA would not meet the definition of a freestanding contract and therefore would be considered to be embedded.
Accounting for the loan origination fee received from the SBA
The AICPA believes the clawback provisions related to PPP loans would not cause this fee to be considered refundable. As a result, the fee would be subject to Subtopic 310-20.
Troubled debt restructuring suspension
Meanwhile, banks may elect to account and report for loans modified under Section 4013 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, according to a statement released by a consortium of regulators in April. Section 4013 permits banks to suspend U.S. GAAP troubled debt restructuring accounting requirements for loans restructured as a result of the pandemic between March 1 and Dec. 31 of this year. More information is available at occ.gov and congress.gov.
GASB addressed a number of important state and local government accounting issues in Technical Bulletin 2020-1:
Coronavirus Relief Fund payments
Recipients should recognize resources received from the Coronavirus Relief Fund as liabilities until the applicable eligibility requirements are met, including the incurrence of eligible expenditures. When the recipient government has met the eligibility requirements established in the CARES Act, that government should recognize revenue for Coronavirus Relief Fund resources received.
Federal assistance and revenue recognition
CARES Act resources, such as Provider Relief Fund payments, that were provided to address a government's loss of revenue due to the pandemic are contingent upon an eligibility requirement, as provided in Paragraph 20d of GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions. Resources received from CARES Act programs that specifically include an eligibility requirement for loss of revenue should be recognized as revenue when the government meets the action-based eligibility requirement.
Treatment of forgivable PPP loans
If a not-for-profit entity that meets the definition of a government determines that its PPP loan will be forgiven in a subsequent reporting period, Paragraph 12 of GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, still requires the governmental entity to continue to report the loan as a liability until that entity is legally released from the debt.
CARES Act resources and nonoperating revenues
CARES Act resources provided through the Provider Relief Fund, the Higher Education Emergency Relief Fund, the CARES Act Airport Grants, the Formula Grants for Rural Areas, and Urbanized Area Formula Grants to a business-type activity or enterprise fund are considered subsidies and, except for resources provided to governments through the Provider Relief Fund's Uninsured Program, should be reported as nonoperating revenue.
No extraordinary or special items
Outflows of resources incurred in response to the pandemic, such as actions taken to slow the spread of the virus or implementation of stay-at-home orders, should not be reported as extraordinary or special items.
More information on GASB Technical Bulletin No. 2020-1 is available at gasb.org.
The effects of the pandemic may be considered rare cases caused by extenuating circumstances outside the control of an entity, according to a FASB staff Q&A. Therefore, the staff believes that an entity may apply the exception in Paragraph 815-30-40-4 for such rare cases. The determination will require judgment based on facts and circumstances.
FASB's staff says that when applying the exception, an entity should consider whether the forecasted transaction remains probable over a period that is reasonable given the nature of the entity's business, the nature of the forecasted transaction, and the magnitude of the disruption to the entity's business related to the effects of the pandemic. If an entity determines that it is no longer probable that the forecasted transaction will occur within that reasonable period beyond the additional two-month period, that exception would not apply.
FASB's staff also believes that it would be acceptable for an entity to determine that missed forecasts related to the effects of the pandemic need not be considered when determining whether the entity has exhibited a pattern of missing forecasts.
More information is available at fasb.org.
HEALTH CARE ENTITIES
Provider Relief Fund payments to not-for-profit health care entities would be accounted for as nonexchange transactions in accordance with Subtopic 958-605, according to an AICPA TQA issued for health care entities.
Contribution revenue would be recognized only to the extent that health-care-related expenses or lost revenues have been incurred at that date that will not be reimbursed from other sources. NFP health care entities will need to evaluate their individual facts and circumstances to determine the extent to which conditions have been met at a given reporting date. Payment amounts received that exceed recognizable contribution revenue are reported as a refundable advance (i.e., a liability).
Because the general distribution payments can be used only for pandemic-related expenses, they would be considered donor-restricted.
For-profit health care entities also would account for Provider Relief Fund payments as nonexchange transactions, the TQA states. But U.S. GAAP doesn't contain explicit guidance on the accounting for government grants to business entities. Therefore, for-profit health care entities may consider analogizing to guidance in IAS 20, Subtopic 958-605, or Subtopic 450-30.
More information is available at aicpa.org.
As the pandemic continues, additional financial reporting challenges seem likely to arise. It's possible that new government aid programs with new mechanisms and rules will need to be deciphered from an accounting standpoint, and organizations may have to adopt new strategies to protect their cash flows.
Keeping a watchful eye for additional guidance on common accounting issues can help financial statement preparers continue to arrive at the right answers as they strive to accurately tell their organizations' stories during these difficult times.
Virus leads to effective date changes
As the pandemic caused a need for new accounting treatments, standard setters recognized a need for the effective dates of new standards to be delayed.
FASB delayed the effective dates for the new revenue recognition and lease accounting standards for certain preparers that haven't yet adopted them. The board also proposed delaying the effective date for its long-duration insurance contract standard.
For more information, visit fasb.org/COVID19.
GASB postponed the effective dates for numerous new standards and implementation guides, including high-profile standards on fiduciary activities (Statement No. 84) and lease accounting (Statement No. 87). For more information, visit gasb.org.