Amidst the chaos created by the COVID-19 pandemic, much of corporate America has been concentrating on how to obtain Paycheck Protection Program (PPP) funds, and then making sure they are adhering to the ever-changing rules on forgiveness. For these companies, a key question is now – how do we account for these funds?
Accounting for PPP
Generally, the funds received through the PPP program are considered loans and should be accounted for as liabilities. No “below-market” interest should be imputed since it is a government-mandated interest rate.
The main questions stem from how to record the expenses paid from those funds, and how to record the potential forgiveness of the loan. Expenses paid from PPP funds should be recorded in the same fashion as they would have been regardless of where the cash originated – as expenses. However, if all or some of the loan is eventually forgiven, the disposition of the loan should then be considered a government grant. While there is no specific GAAP guidance regarding government grants, it is generally accepted to record the disposition of the loan as “other income” on the income statement. Since the rules for forgiveness continue to evolve, we advise not to record the disposition of the loan until a company receives forgiveness confirmation from their lender.
After a company receives, uses, and converts the PPP loan into a grant, the second priority for accounting departments becomes – what financial statement implications exist due to COVID-19?
GAAP and Audit Considerations
The Financial Accounting Standards Board (FASB) has recently delayed the effective date of two impactful accounting standards for private companies, allowing them to concentrate on the survival of their companies. FASB ASC Topic 606, Revenue from Contracts with Customers, was to be implemented by private companies by the fiscal year ended December 15, 2019, but that implementation date was recently extended by one year. Many companies have already implemented this new revenue recognition standard, but if they have not yet issued their December 31, 2019 financial statements, this delay does give them the option of deferring implementation an additional year.
The FASB has also delayed the effective date of FASB ASC Topic 842, Leases. Although this standard was not required to be implemented until fiscal years ended December 15, 2021, it was recently delayed until 2022.
In addition to these accounting standard delays, a few existing accounting standards become more relevant during the time of COVID-19. In almost all cases, COVID-19 will be a required subsequent event disclosure. For calendar year-end 2019, companies will likely only need to disclose the event in the footnotes of their December 31, 2019 financial statements as COVID-19 was not “known” as of that date. However, if a company has an early 2020 fiscal year-end, subsequent to becoming aware of COVID-19, the subsequent event may result in asset impairments or contingent losses that need disclosed and/or recorded. Fast forwarding 12 months – it is unclear what the financial statement impact will be for fiscal year 2020 and beyond.
In addition, due to the uncertainty posed by COVID-19, all competent accounting firms performing attestation engagements will be requesting management to perform a going concern analysis. This analysis requires management to assess the company’s ability to continue in operation for at least the next twelve months. Items management should include in this assessment are not only operation-related, but also the company’s ability to obtain outside financing or capital. The effect of this going concern analysis may result in additional footnote disclosure, or an emphasis-of-matter paragraph in their audit opinion, depending on the assessed outcome.
This information is for general guidance. If you have any specific questions, please reach out to our team at MWB.