News
PPP Financial Reporting
February 9, 2021:
June 3, 2020:
April 17, 2020:
FEBRUARY 9, 2021 UPDATE:
Accounting for PPP and Navigating PPP & ERC Eligibility
As business owners finalize their books for 2020, many wonder how to handle Paycheck Protection Program (PPP) loans that have not yet been forgiven. Recently released accounting guidance provides significant flexibility for these loans, but business owners must act quickly. For-profit entities have three options under U.S. Generally Accepted Accounting Principles (GAAP).
- ASC 470, Debt
The PPP loan would be reported as debt until the entity has been legally released as the debtor (fully forgiven). This would likely not be until the date the Small Business Association (SBA) formally approves forgiveness. A non-taxable gain would then be recorded when the entity has been legally released from the repayment obligation. This model is the most straightforward and requires the least amount of judgment. However, the length of time between recording the debt and official forgiveness will be longer. The lag in receiving official forgiveness may lead to PPP expenses and revenues being recorded in different periods – which could cause tax basis problems in 2020 – and could impact key financial statement ratios. - ASC 958-605, Accounting for Contributions
Although this guidance applies to not-for-profit entities, the Financial Accounting Standards Board (FASB) staff has indicated for-profit entities are not precluded from applying this guidance by analogy when appropriate. Under this guidance, the entity treats the PPP loan proceeds as an advance of a conditional grant, and revenue is recognized as the conditions of the grant are met. Under this model, the PPP loan would initially be recorded as a liability, followed by a reduction to the liability. When all requirements for forgiveness have been met, an entity can recognize the PPP loan proceeds as income and remove the liability. This model may permit an entity to recognize the PPP loan as income before the SBA formally approves forgiveness. This method requires more judgment than the debt model, but for many businesses, it allows all of the revenue to be recognized in the same period as the expenses are incurred. - ASC 450-30, Gain Contingency Recognition
When applying this model, a for-profit entity would initially record the proceeds as a liability, and, when all contingencies related to receipt of the loan have been met and the grant proceeds are realized or realizable, the earnings impact would then be recognized. The grant proceeds would not be considered “realized or realizable” until forgiveness has been received. This method is similar to the debt model, but it should only be used when the entity expects forgiveness, and it allows the entity to avoid reporting the PPP loan as debt in the financial statements.
Navigating the PPP2/ERC Eligibility Standards
The COVID relief bill signed into law in December by then-President Donald Trump provided an expansion of two separate business aid programs, including the Second Draw Paycheck Protection Program (PPP) loans into the first quarter of 2021 and the continuation of the Employee Retention Credit (ERC) through the first two quarters of 2021.
To access either a Second Draw PPP Loan or a Q1/Q2 ERC, a business must show a sufficient reduction in business activity, as measured by “gross revenue,” between a specified period in either 2020 or 2021 and the equivalent period in 2019. Complicating matters, the revenue reduction rules are inconsistent between programs as it relates to the size of the reduction needed to qualify for the benefit, the definition of what is included in “gross receipts,” and the periods being compared. However, both programs appear to provide flexibility in how a business calculates “gross receipts,” and as such may provide opportunities for planning for those mindful of the opportunities.
Click here for an in-depth white paper on these issues and planning opportunities.
WK will continue to provide additional guidance with regard to the Paycheck Protection Program and other potential relief measures as more information is released. If you have any questions about the applicability of this information to your specific situation, please contact your WK advisor.
JUNE 3, 2020 UPDATE:
FASB Delays Implementation of New Financial Reporting Standards Due to COVID-19 Challenges
On June 3, 2020, the FASB issued Accounting Standards Update (ASU) 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) Effective Dates for Certain Entities, to provide some relief to certain entities as they cope with the many challenges and hardships related to the COVID-19 pandemic.
The ASU defers the effective date of FASB ASC 606 Revenue from Contracts with Customers for certain entities that have not yet issued their financial statements. Those entities may elect to defer the adoption of FASB ASC 606 by one year and adopt the standard for annual reporting periods beginning after December 15, 2019. The effective date for a public business entity, a not-for-profit (NFP) entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and an employee benefit plan that files or furnishes financial statements with or to the SEC is not affected by the amendments in this ASU.
The effective date of FASB ASC 842, Leases, is also deferred by one year. Private companies and private NFPs may defer the new leases standard to fiscal years beginning after December 15, 2021. Public NFPs that have not yet issued their financial statements reflecting the adoption of FASB ASC 842 may defer adoption to fiscal years beginning after December 15, 2019.
Entities are permitted to implement both FASB ASC 606 and FASB ASC 842 prior to the revised effective dates above. If you have any questions or concerns, please contact your Williams-Keepers advisor. We have been, and will continue to be, working with you to assist with the implementation of these standards. Despite the additional time provided to implement the revenue standard and lease standard, we continue to recommend companies begin preparing to implement these standards now, as it may take significant time and resources to determine the impact on financial ratios and covenant compliance.
APRIL 17, 2020:
COVID-19 Impact on Business Operations, Internal Controls, and Financial Statement Disclosures
The COVID–19 pandemic has impacted the economy and will likely continue to for some time. In addition to creating uncertainty and volatility in financial markets and disruptions to supplies and distribution chains, the crisis will directly affect cash flows. The pervasive impact of the pandemic is evolving and presenting challenges to organization’s financial statement reporting, creating accounting, internal control, and disclosure implications for the year ended December 31, 2019 and beyond.
Asset Impairment
Because COVID – 19 was not considered a global pandemic until 2020, asset impairment resulting from the pandemic should not be recognized in financial statements for years ended on or before December 31, 2019. However, if forecasts, projections and valuations related to impairment calculations at December 31, 2019 are expected to change significantly as a result of the pandemic, subsequent event disclosures should be considered (see also “Subsequent Events.”) For periods ending after December 31, 2019, the effects of the pandemic should be considered in evaluating asset impairment. Intangible and tangible assets, goodwill, realizability of deferred tax assets, inventory, right-of use assets, accounts receivable, contract assets (allowance for doubtful accounts) and capitalized contract costs may be affected.
Accounts Receivable
The financial impact of the pandemic will be felt far and wide. One of the significant impacts may be in the collectability of accounts receivable. Due to cash flow issues experienced by customers, the risk of collecting current receivables is likely increased. When and if companies’ sales return to more normal levels, there will still be greater risk of collection from many customers. It is also likely that some customers will be asking for extended payment terms. Thus, the assumptions and methodology used for estimating the allowance for doubtful accounts should be adjusted for the increased risks.
Inventory
Organizations should evaluate the need to adjust the carrying value of inventory. For many industries, the pandemic has triggered unplanned work stoppages or severe slowdowns due to labor and material shortages. Consider the effects on inventory costing and fixed overhead allocations. Excess fixed overhead costs that cannot be allocated to production due to underutilized capacity must be expensed in the period they are incurred.
Revenue Recognition
The amount of revenue recognized, and the pattern of revenue recognition could change due to the pandemic. Variable considerations that may be impacted include discounts, refunds, price concessions, performance bonuses and penalties.
Debt
Organizations that may have decreased revenues, higher operating costs and cash flow challenges could seek additional financing, restructuring of existing debt agreements or obtain waivers in debt covenants. If covenants are breached and a waiver is not obtained, the debt may need to be reclassified from long-term to current on the balance sheet.
Reimbursements
Organizations that have interruption insurance may be entitled to a certain amount of insurance proceeds to cover some or all costs. In addition, there may be government grants/incentives available to help support businesses. Anticipated insurance reimbursements are considered a gain contingency and are subject to the guidance in ASC 450-30. According to this guidance, reimbursement can be recognized only if the proceeds have been received or if confirmation of the amount of proceeds has been received from the insurer.
If the interruption policy does not clearly cover losses due to a pandemic, organizations are still encouraged to file a claim with insurance in the event government action or litigation provides relief in the future.
Equity Method Investments
Equity method investments, including joint ventures, must be reviewed for impairment when events or changes in circumstances indicate the carrying amount of the investments might not be recoverable in accordance with ASC 323. The pandemic may cause temporary impairment in these investments that should be recognized as a loss as soon as they are identified.
Credit Losses for Financial Institutions
If your organization has adopted the changes to credit loss impairment, the evaluation of the future expected economic conditions under the Current Expected Credit Loss (CECL) model might be affected by the current state of the financial markets. Organizations still operating on the incurred loss model for credit loss impairment may need to re-evaluate the appropriate allowance for credit losses that have been incurred.
Internal Control
A remote working environment may introduce new risks that require significant changes to policies and procedures. Internal controls should be evaluated and adapted on an ongoing basis to operate effectively in this ever-changing time. Consider performing a risk assessment to identify areas of concern. Regular communication with your team is encouraged. Management may also consider additional technology that is currently not in use, such as positive pay with a financial institution.
Loss Contingencies
A loss contingency arises when there is a situation for which the outcome is uncertain but will be resolved in the future, possibly creating a loss. Losses should be recognized when probable and estimable, which is likely before they are actually incurred and/or paid. ASC 450 requires disclosure of the nature of a contingency when there is at least a reasonable possibility that a loss has been incurred. For contingencies that meet the threshold for the disclosure, but no liability has been recognized, organizations must disclose an estimate of the possible loss or the range of possible losses or state that such an estimate cannot be made. If an organization has recognized a liability, it must disclose the amount only if not doing so would make the financial statements misleading.
Subsequent Event Disclosures
The global nature of the COVID–19 officially categorizes it as a Nonrecognized Type II subsequent event that may need to be disclosed as a subsequent event. For example, subsequent to year-end organizations may enter into contract modifications or new lending agreements, receive capital contributions, experience shutdowns of operations or incur substantial losses on financial assets measured at fair value. Additionally, organizations may experience losses due to supply chain disruptions or volatility in commodities markets that should be disclosed. A triggering event related specifically to the pandemic for goodwill and long-lived asset impairment testing is also a Nonrecognized Type II subsequent event at December 31, 2019.
For years ending after December 31, 2019, the pandemic is a current period event that will require ongoing evaluation to determine the extent to which developments after the respective reporting date should be recognized in that reporting period. A quantitative disclosure of the estimated financial effect of the subsequent event is required if it can be made. This estimate will be based on the facts available at the date the financial statements are issued and should avoid general forward-looking statements.
Going Concern Disclosures
ASC 205-40 requires management to evaluate an organization’s ability to continue as a going concern within one year after the date the financial statements are issued. Disclosures in the notes to the financial statements are required if management concludes that substantial doubt exists. December 31, 2019 financial statements that have not yet been issued may require management to consider the pandemic in their going concern evaluations. For many organizations, a detailed going concern analysis may not have been necessary previously. However, with the severe and prolonged effects of the pandemic, organizations will likely require a closer monitoring of the going concern assessment throughout 2020 and possibly beyond.
Use of Estimates
The impact of the pandemic may result in a reasonable possibility that estimates will change by a material amount in the near term, especially for organizations that estimate based on metrics such as stock and commodity prices, interest and currency exchange rates and revenue forecasts. Changes in the condition, situation, or circumstances that were used to develop the estimates that existed at the date of the financial statements should be included in the financial statement disclosures. The evaluation of the changes that should be disclosed is based on the conditions that exist when the financial statements are issued or available for issuance.
The potential economic impact of COVID–19 continues to evolve rapidly. Organizations are encouraged to maintain close communications with their board of directors, legal counsel and Williams-Keepers LLC as the circumstances evolve and the impact of the pandemic becomes more evident.