The impact of coronavirus (“COVID-19”) on the global economy has shifted businesses’ and organizations’ main focus from standard operating procedures to navigating through new laws and regulations, analyzing staffing needs, renegotiating contracts with customers and vendors, and determining whether certain operations are no longer feasible given the economic climate. COVID-19 not only altered the way in which businesses and organizations conduct their business operations, but it also impacted the accounting principles surrounding such business practices.
During 2020, the Financial Accounting Standards Board (“FASB”) issued deferrals of several Accounting Standards Updates (“ASUs”) to provide businesses and organizations the opportunity to focus on operations without the additional pressure to add new accounting principles into their current financial reporting packages. During 2020, the FASB released ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842); Effective Dates for Certain Entities in response to the ongoing impacts of the COVID-19 pandemic on US businesses. ASU 2020-05 provides for a limited deferral of the effective dates for implementing previously issued Accounting Standards Codification (“ASC”) 606 and ASC 842 to afford relief to businesses and organizations in light of financial hardships and navigating through the “new normal” for business operations.
ASU 2020-05 defers the implementation of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which provided comprehensive guidance for revenue recognition. ASU 2020-05 affects businesses and organizations that are not public business entities, not-for-profit entities and other entities that have not yet issued financial statements that reflect the new revenue recognition guidance. If a business or organization has not yet implemented ASC 606, it may defer application of the new standard to fiscal years beginning after December 15, 2019.
ASU 2020-05 also defers the implementation of ASU 2016-02, Leases (Topic 842), which affects entities in the “all other” category (those that are not public business entities, certain not-for-profit organizations and certain employee benefit plans), as well as public not-for-profit entities that have not yet implemented the ASU. Entities in the “all other” category may defer implementation of ASC 842 to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
As previously mentioned, changes in economic activity caused by the pandemic may cause entities to renegotiate the terms of existing contracts and arrangements. Examples of such contract changes include, but are not limited to, contracts with customers, compensation arrangements with employees, leases, and terms of other financial assets and liabilities. As a result of these changes, entities will need to ensure that the appropriate guidance in US GAAP is considered. The modification of lease contracts requires careful consideration of ASC 842 (or ASC 840, Leases, if your business or organization has not yet adopted the new lease accounting requirements) to determine whether a modification results in a new lease or the continuation of the existing lease. The FASB has issued a Staff Q&A on lease modifications that applies to entities that provide or receive lease concessions in response to the need for relief during the COVID-19 crisis.
There are several COVID-19 considerations to be made when accounting for operational changes throughout a business or organization. Facing a myriad of economic, regulatory and operational uncertainties, many businesses and organizations are struggling to perform an analysis of forward-looking information and/or cash flow forecasting. Nevertheless, this type of information is essential in an entity’s assessment of, among other things, the impairment of non-financial assets (including goodwill), the realizability of deferred tax assets, and the entity’s ability to continue as a going concern. As such, entities will need to make good-faith estimates and prepare comprehensive documentation supporting the basis for such estimates, including but not limited to, key assumptions used and their sensitivity to change.
As a result of COVID-19, an entity should consider whether or not it plans to discontinue or has already discontinued certain operations of the business or organization and consider discontinued operations accounting. Discontinued operations could indicate businesses or organizations are no longer utilizing portions of leased office and/or manufacturing space. All such downsizing and disposals could have accounting implications that should be discussed with the entity’s accounting advisor. An entity should consider the impairment of long-lived assets, intangibles, and goodwill, given these are non-financial assets that assess recoverability and impairment that rely on the development of cash flow projections that are subject to significant uncertainties.
As a result of COVID-19 and its associated effects, entities need to consider whether, in their specific circumstances, there is substantial doubt that the entity can continue as a going concern. A common misconception across industries is to perform a going concern analysis for one year following the entity’s balance sheet date. However, a business or organization should perform a going concern analysis one year following the date in which the interim or annual financial statements are issued or available to be issued, when applicable. An entity may be able to alleviate substantial doubt, if it exists, if it is probable that its plans will be effectively implemented and, when implemented, will mitigate the conditions that are raising substantial doubt in the first instance and will do so within one year after the issuance of the date of the financial statements.
Additionally, an entity should also consider whether debt agreements, if any, include a “Material Adverse Effect” clause. Depending on the impact of COVID-19 on the entity or the entity’s industry, the lender may determine that such an adverse effect has since occurred, which could result in the debt being callable. Such a determination could have a significant impact on a going concern consideration, and borrowers should be prepared to challenge any such determination.
Although the FASB and US GAAP have provided several accounting considerations, the US Federal Government has also responded to the impacts of COVID-19 on business operations. In March 2020, the Federal Government passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. This Act provided for eligible organizations to apply for the Paycheck Protection Program (“PPP”) Loan. Although businesses and organizations were quick to apply for the PPP loan for economic aid to assist mainly with payroll expense, there are several factors to consider when accounting for an entity’s PPP loan.
Under US GAAP, a PPP loan can be accounted for either through debt accounting or governmental grant accounting depending on the facts and circumstances surrounding the loan. According to FASB ASC 470, Debt, upon the date in which the PPP loan proceeds were received by the borrower, the borrower should include a PPP loan on the balance sheet as a debt liability, classified between current and non-current liabilities. The gain on loan forgiveness would be deferred until forgiveness is granted on a portion or all of the loan balance by the lending institution and the Small Business Administration (“SBA”) and recorded to “other income” or a gain outside of operations in accordance with FASB ASC 450-30-25-1. At the time in which the loan is forgiven and the entity is legally released from the liability, the borrower should derecognize the liability in accordance with FASB ASC 405-20-20-1(b).
Furthermore, if an entity expects to comply with the PPP eligibility and loan forgiveness criteria, it may account for the forgivable PPP loan as, in substance, a government grant that is earned through the entity’s compliance with the forgiveness criteria. The anticipated PPP loan forgiveness would be recognized in other income using a systematic and rational basis over the period in which the entity recognizes and expenses the costs the grant is intended to cover. The straight-line method is likely the most appropriate method, assuming the expenses are recognized ratably over the 8- or 24-week covered period. It is important to note that all expenditures should be recorded in the typical expense accounts on the income statement or statement of activities. Expenses should not be recorded directly against the loan, regardless of whether they may qualify for forgiveness. In accordance with the matching principle, forgiven expenses and the gain are recorded on a gross basis on the financial statement.
As organizations begin to close their year-end accounting records, Tronconi Segarra & Associates is committed to assisting our clients and other entities with complex accounting matters and providing helpful insights regarding new accounting standards updates. Please refer to our website to access our COVID-19 resource center and recorded webinars for further detail regarding topics discussed above.
For more information or questions on this topic, please contact Charles Pezzino, CPA, Partner or Alexis Weber, CPA, Senior Accountant Tronconi Segarra & Associates. They can be reached at cpezzino@tsacpa.com or aweber@tsacpa.com or 716.633.1373.
