COVID Accounting Guidance
Stimulus Relief Dollars: Accounting and Financial Reporting Considerations
- Stimulus dollars have begun to flow into organizations, raising the question of how to record funds in financial records.
- Accounting and disclosure considerations can vary significantly, based on the type of relief your organization received.
Over the last few weeks, organizations have been busy adjusting to an economic fallout in the face of the COVID-19 pandemic, while at the same time navigating the newly available government stimulus measures.
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There are various forms of relief available to businesses, such as Paycheck Protection Program (PPP) loans, grants, income tax credits, and more.
As stimulus dollars start to flow, it’s important to understand how to record those funds in your financial records. Accounting and disclosure considerations could vary significantly based on the type of relief you receive.
Common stimulus relief programs
The following examples can help you understand how to record stimulus dollars.
A portion of the stimulus funds come from low interest loans and PPP loans. Some or all of the principal and interest may be eligible for forgiveness. When you receive these stimulus funds, record them as a liability. Upon formal approval of forgiveness from the lender, the liability would be recognized as income pursuant to the accounting guidance for debt forgiveness.
Although many aspects of loan forgiveness are not yet defined, the CARES Act Section 1106 gives us some idea of how forgiveness will work:
- Borrowers of PPP loans will apply for forgiveness directly with the lender.
- The application will include documentation supporting the amount of forgiveness and certifications by the borrower.
- The lender will issue a decision on the amount of forgiveness within 60 days of the application.
- Over the coming days and weeks, the SBA will provide additional guidance and possibly other requirements.
Because the above process includes a degree of uncertainty until the lender finishes its verification and approval, the PPP loan principal and accrued interest would likely remain a liability until the lender formally issues its decision on how much, if any, of the principal and interest will be forgiven.
Determine where to record debt forgiveness based on the type of your organization.
- Industries with a performance indicator, such as health care entities, must reflect the debt forgiveness income above the performance indicator.
- For-profit entities should record funds as a separate debt extinguishment line item in the financial statement. Note, the standards do not prescribe if it should be reported as operating or non-operating. Each organization should evaluate that based on their accounting policies.
People commonly ask whether interest should be imputed on these loans. Although the interest rates on these loans may be below market, the imputed interest accounting guidance does not apply to transactions where interest rates are affected by the tax attributes or legal restrictions prescribed by a governmental agency. Therefore, no imputed interest rate or discount needs to be calculated or recorded for these loans.
If you receive a governmental grant, factor in the new revenue recognition standards — standards you may be adopting for the first time.
- Nonprofits: evaluate the assistance received to determine if it represents a payment that should be accounted for as an exchange transaction under ASC 606 or as a contribution under ASC 958-605. For assistance considered a contribution within the scope of ASC 958-605, revenue recognition will be dependent on whether it is deemed conditional (whether the agreement includes both a barrier and a right of return or release).
- Other entities: the provisions of ASC 958-605 apply to all entities, including business entities who receive contributions within the scope of this topic. However, transfers of assets from governments to business entities are excluded. In situations where there is no GAAP that specifically addresses the accounting for a transaction, businesses should look to similar guidance for assistance in the application. In this case, guidance in ASC 958-605 or in IAS 20 (an IRFS standard on accounting for government grants and assistance) could be considered for the accounting.
Tax credits and provisions
Finally, you may receive relief in the form of payroll tax credits. Excess credits may be refundable, and certain payroll tax payments may be deferrable to future periods.
These credits from a government entity aren’t subject to ASC 740, Income Taxes, because they are not based on taxable income. They are considered a government grant. Therefore, follow the accounting guidance for government grants and assistance and present the funds either as an expense offset or as other income.
How can we help?
Carefully evaluate the funding assistance you receive to determine the appropriate accounting. In the coming days, we will post articles that address industry-specific considerations. CLA is here to assist you and answer your questions. Contact us today.Contact Us