Closing the Books in a COVID-19 World

By SCOTT STERN, CPA

GRASSI

While so many things in 2020 have been postponed, cancelled or stalled, closing the books at the end of the year is a reality that all business owners will need to face as planned. Yet, this routine practice will look nothing like past years in many ways.

ACCOUNTING FOR PPP LOANS One of the biggest changes this year will impact borrowers of Paycheck Protection Program (PPP) loans. So much about the PPP is unique from other loans or government relief, particularly its potential for loan forgiveness. There is simply no direct precedent for how a business should present this loan within their financial statements.

Fortunately, the American Institute of CPAs (AICPA) recently issued Q&A Section 3200.18 Long-Term Debt, which sets forth accounting method options that for-profit and not-for-profit borrowers can use to report PPP loans.

Though its legal form is debt, a PPP loan may be considered a government grant in substance, according to the AICPA. For-profit entities can account for the funds in one of the following ways: y Loan under FASB ASC 470, Debt.

Under this method: y Loan funds will accrue interest under FASB ASC 835-30, and additional interest should not be imputed even though the rate is below market. y Derecognize liability under ASC 405-20-40-1 only when the loan is forgiven in whole or part and the borrower is legally released or the borrower pays off the loan. y Once the loan is forgiven in whole or in part and the borrower is legally released, debit Loan Payable and credit Gain on Extinguishment. y Once the borrower pays off the loan, debit Loan Payable and credit the Cash account. y Governmental grant by analogy to

IAS 20, Accounting for Government y

y Grants and Disclosure of Government Assistance. Under this method: y Do not recognize assistance until the borrower has reasonable assurance (similar to “probable”) that conditions will be met and assistance will be received. y Once the threshold is met, recognize earnings impact over the period in which the business entity incurs the costs the grant is intended to compensate. y When the entity receives the funds, debit the Cash account and credit

Deferred Liability. y When the threshold for forgiveness is met, record ratably over the relevant period. Debit Deferred Liability and credit Other Income (or reduction in Compensation expense or other cost to be covered). Gain contingency by analogy to FASB ASC 450-30. Under this method: y Earnings impact is recognized when all contingencies related to receipt of the assistance are met and the gain is realized or realizable. y When the business entity receives the funds, debit the Cash account and credit Loan Payable. y When all contingencies are met and gain is realized or realizable, debit

Loan Payable and credit Gain. Conditional contribution by analogy to FASB ASC 958-605. Under this method: y Contribution is conditional given the requirements of forgiveness, so earnings should not be recognized until requirements are substantially met or explicitly waived. y Once the business entity receives the

y funds, debit Cash and credit Refundable Advance. Once conditions of release have been substantially met or explicitly waived, debit Refundable Advance and credit Contributions.

This conditional contribution method can also be used by nonprofit borrowers. But, unlike their for-profit counterparts, nonprofits have only two choices of accounting method when reporting PPP funds: y Loan under FASB ASC 470, Debt.

Under this method: y Interest should be accrued under FASB ASC 835-30 and additional interest should not be imputed even though the rate is below market. y Derecognize liability under ASC 405-20-40-1 only when either the loan is forgiven in whole or part and borrower is legally released (debit the Loan Payable and credit Gain on Extinguishment) or borrower pays off the loan (debit the Loan Payable and credit Cash). y Conditional contribution by analogy to FASB ASC 958-605. This method should be chosen if the nonprofit entity deems the loan to be, in substance, a grant to be forgiven. Under this method: y The contribution is conditional, given the requirements of loan forgiveness. Do not recognize earnings until requirements are substantially met or explicitly waived. y Once the nonprofit receives the funds, debit Cash and credit Refundable Advance. y Once the conditions of release have been substantially met or explicitly waived, debit Refundable Advance and credit Contributions.

Both the Securities & Exchange Commission and the Financial Accounting Standards Board have indicated that they would not object to the accounting methods above. Regardless of the method used, all entities with material PPP loans should disclose their accounting policy for such loans and the related impact to the financial statements. NEW EXPENSES In addition to new PPP funds flowing into a company, CPAs should also help clients ensure they are accounting for all new costs flowing out of their organizations because of the COVID-19 pandemic. Accrued expenses that might never have appeared on their balance sheets before include costs such as personal protective equipment, plexiglass installation, remote work equipment, hygiene training, sanitization stations, workplace redesign to accommodate social distancing and onsite medical personnel to conduct health screenings.

Clients in certain industries, such as construction, should also review their estimated costs on each job and determine the additional completion costs that were incurred after mandated closures, new safety requirements and reduced capacity on jobsites.

OTHER CONSIDERATIONS For many corporate taxpayers, the pandemic disrupted every area of business operations, resulting in drastically different year-end scenarios than what they have experienced in the past. Many are receiving government aid for the first time ever, and with that comes new reporting requirements, tax obligations and considerations.

For example, PPP loan forgiveness will not be subject to the tax obligations that are imposed on other cancellations of debt, but the expenses that are paid for by forgiven loan funds are currently not deductible for tax purposes. In a pass-through entity, this taxable income will flow through to the shareholders.

While recovering from COVID-19-related losses, PPP borrowers and other taxpayers may have other debt forgiven during creditor negotiations. These cancellations of debt will need to be accounted for and treated as taxable income.

Many businesses will have higher-thannormal levels of outstanding receivables this year, as their customers or clients also grapple with the economic impact of the pandemic. Remind clients to stay on top of their collections and ensure their payables are properly recorded within the right time period.

Inventory levels may also be far from what was expected at this point in the year, as mandated closures, supply chain disruptions and altered consumer behavior continue to impact many businesses’ bottom lines.

The CPA’s advisor role will be critical to business clients in this final quarter of a historic year, as it has been throughout the pandemic. Leave no stone unturned or question unasked when helping clients tie up the many confusing loose ends of 2020.

Scott Stern, CPA, CCIFP, is an audit principal at Grassi. He can be reached at scott.stern@grassicpas.com.

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