Financial Reporting Considerations in Light of COVID-19

By Joe Bishop

As we are all aware by now, the COVID-19 pandemic has had countless effects on businesses and individuals everywhere. Much focus has understandably, and rightfully, been placed on how to navigate through the provisions of the CARES Act, Paycheck Protection Program, Consolidated Appropriations Act and the tax consequences of these initiatives.

For those businesses that have financial reporting requirements to meet, it is also important to understand how their audited or reviewed financial statements will be affected by the current environment. While each and every business will certainly have unique factors to consider, the three matters outlined below will be of significant importance to most small and medium-sized businesses.

Accounting for Paycheck Protection Program (“PPP”) Loans

In June 2020, the AICPA issued guidance on how to account for PPP loans under Generally Accepted Accounting Principles (“GAAP”). Most businesses, aside from governmental entities, are given two options. The first option is to account for the PPP loan as regular debt, meaning that the funds received would be recorded as a liability on the balance sheet (notes payable), and interest would be accrued at the rate and over the term provided for in the loan. If and when all or part of the loan is forgiven, the liability would be reduced by the amount forgiven, and a “gain on extinguishment” would be recorded. The gain on extinguishment would be presented as an item of Other Income on the entity’s income statement or statement of operations, below Operating Income.

The second option is to account for the PPP loan as though it were a government grant. Under this method, the funds received would initially be recorded as a deferred income liability on the balance sheet. Then, the entity would evaluate whether there is reasonable assurance of the following:

  • Any conditions attached to the loan will be met
  • Forgiveness will be obtained

If the entity believes that reasonable assurance exists for both criteria, then the funds can be recognized (reclassified from deferred income to income) on a systematic basis as the entity incurs qualified expenses, as defined by the PPP. As is the case under the first option, any income recognized would be presented as an item of Other Income on the entity’s income statement or statement of operations.

A not-for-profit entity may also follow a model similar to the second option, in which the PPP loan would initially be recorded as a deferred income liability on the balance sheet, and then systematically recognized as a contribution as the conditions of the loan are met (as the entity incurs qualified expenses).

Deferral of new Revenue Recognition and Lease Accounting Standards

Financial statement issuers have likely heard about a couple of major standards updates that have been in the pipeline over the past few years. First, the new revenue recognition standards, which represents a complete overhaul of the previous standards and will be relevant to virtually all revenue-generating entities, were set to become effective for fiscal years beginning after December 15, 2018 (meaning that implementation would have been required for all 2019 financial statements). Second, the new lease accounting standards, a highly complex set of standards that will affect any entity that leases real or personal property, were set to become effective for fiscal years beginning after December 15, 2020 (implementation required for all 2021 financial statements).

In June 2020, the FASB issued Accounting Standards Update (ASU) 2020-05, which defers the effective date of both standards updates for one additional year, but only for nonpublic entities that have yet to issue financial statements reflecting these updates. Therefore, such entities may elect to push back the implementation of the new revenue recognition guidance until the time comes to prepare their 2020 financial statements. Similarly, the new lease accounting standards may be pushed back until the time comes to prepare 2022 financial statements.

The FASB issued this update in recognition of the fact that, in light of the current environment, many businesses likely do not have the time or resources to study and apply these changes. That being said, it is important to note that the new revenue recognition standards will apply to revenues earned during the current year. It may be worthwhile for businesses to consider now the effects that the new standards will have on their financial statements.

Going Concern Considerations

When undergoing a financial statement audit or review, businesses are required to assess their ability to continue operating as a going concern for at least one year after those financial statements are issued. In light of the pandemic, this question takes on a greater significance, and potentially gives rise to additional reporting and disclosure requirements if the assessment is uncertain. Needless to say, business owners and key managers should always keep track of and document the financial well-being of the business, and its prospects moving forward. However, they may now find their outside accountants or auditors asking for documentation to substantiate their going concern assessment. Such documentation might include cash flow forecasts or operating budgets, minutes of board of directors meetings, and agreements related to financing obtained subsequent to the balance sheet date. Having this documentation complete and ready can go a long way toward having an audit or review run more smoothly.

We are always available to help our clients with each of the above matters and much more, so please feel free to contact us with any questions.

How the Recent Stimulus Package Impacts You and Your Business

By Tim Moore

Following a period of uncertainty and considerable publicity leading up to a potential government shutdown last week, President Trump signed the combined stimulus and appropriations bill (“Consolidated Appropriations Act, 2021”, “Bill”) into law.

The combined Bill provides funding to keep the government operating while delivering a wide range of benefits to individuals and businesses hit hard by the Coronavirus pandemic.  Of importance here, there are not so widely reported provisions that are tax related and that will provide a measure of relief to taxpayers, both individual and business.

Individuals

More Recovery Rebates – The Bill provides for a credit/payment of $600 per person, which will be sent to eligible taxpayers in the form of a cash payment. It represents a refundable tax credit against 2020 tax. The initial payment will be based on the income of the taxpayer(s) from 2019, but the final amount of the credit on the tax return will be based on the income the taxpayer(s) report on their 2020 income tax return.  The credit phases out for single taxpayers starting at $75,000 of modified Adjusted Gross Income ($112,500 for Head of Household and $150,000 for Married Filing Jointly) with a $5 reduction for each additional $100 of income.  If an advance payment exceeds the credit as finally determined, the recipient will not be required to repay the difference, but if the payment is less than the final credit, the taxpayer(s) will be given the difference as a reduction of their tax bill.

Flexible Spending Arrangement (FSA) Temporary Rules – The Bill relaxes rules regarding carryover of unused benefits from 2020 to 2021 and 2021 to 2022 for both health and dependent care, generally, up to the full annual amount.  Plans must specifically adopt these changes in order for participants to benefit.

Charitable Contributions – There are various provisions that affect the deductions for charitable contributions.  For taxpayers who do not itemize their deductions, the $300 deduction for charitable cash contributions has been increased to $600 for joint filers in 2021.  For taxpayers who itemize, the CARES Act had suspended the 60% of AGI limitation for one year, 2020, and eliminated the percentage limitation for contributions made for efforts in qualified disaster areas. The Bill extends these changes to 2021.

Medical Expense Itemized Deductions –The law reduces/restores the 7.5% floor for deduction of medical expenses for all taxpayers, regardless of age, retroactively and prospectively to 2019 and 2020.

Educator Expense Deduction – For educators accustomed to a deduction for out-of-pocket costs associated with supplies for their work, the Bill clarifies that supplies, like PPE, provided to reduce the spread of the Coronavirus, are eligible for the deduction.

Tuition Deduction to Tax Credit – The former deduction for qualified tuition and related expenses, after 2020, will be replaced by increased phase-outs of the Lifetime Learning Credit.  In most cases, this change should not make much difference, but the alteration is worthy of note if the deduction has been taken in the past and would otherwise have still applied beyond 2020.

Businesses 

PPP Loans – We previously reported on the deductibility of expenses paid with PPP loans as well as the implementation of PPP2. This is great news and you can read more about it here.

100% Deduction for Business Meals – If you were in business prior to the 1986 Tax Act, you may reminisce about the ability to deduct 100% of business-related meals.  The good ole days are back…for two years – 2021 and 2022.  Ostensibly, this is an offering to help re-invigorate the restaurant industry hard hit by the pandemic.

Employee Retention Credit A credit under the CARES Act provided a benefit for employers subject to suspension of operation or significant decline in gross receipts.  The benefit consists of a refundable credit, immediately accessible against payroll tax deposits, based on wages paid to retained employees between March 13, 2020 and January 1, 2021.  The Bill extends the credit to June 30, 2021 while increasing the credit rate, broadening the definition of a significant decline in gross receipts, increasing the wage base and providing a wealth of other clarifications/expansions of its applicability.  Notably, there is clarification that recipients of PPP loans may qualify for the credit, so long as those same wages were not funded with PPP loan proceeds that are forgiven.

Sick and Family Leave Tax Credit (FFCRA leave credits) – This refundable credit against payroll taxes that helps subsidize COVID related sick and family leave was extended until March 31, 2021.  Prior to January 1, 2021, most employers were required to provide the leave, but it is made voluntary effective in 2021.  For employers that wish to provide the leave in 2021, the refundable credit is still available. To read our previous article on this topic click here.

Extenders (both Individual and Business)

The Bill put in place several so-called Extenders that increase the life of previously enacted tax breaks, most of which were not related to the pandemic provisions.  Generally, they include:

  • Exclusion from income of qualified principal residence debt forgiveness – through 2025
  • Employer tax credit for paid family and medical leave – through 2025
  • Tax-free employer payment of student loans – through 2025
  • Mortgage insurance premiums deductible as qualified residence interest – through 2021
  • Nonbusiness energy property credit (10% for window, doors and the like) – through 2021
  • Energy efficient homes credit (up to $2,000) for qualified new homes – through 2021
  • Residential energy-efficient property/biomass fuel property credit – generally through 2022

These are but a few of the numerous tax provisions in the Bill.  There are others that relate more specifically to real estate, venue operators, the brewing/distilling industry, farming, motorsports and other industries.  There are also provisions that provide for enforcement, compliance and ministerial rules associated with benefits granted under this Bill and the previous relief bills.

For more information on how the Consolidated Appropriations Act impacts you or your business, please contact Snyder Cohn.

Disclaimer: Please note this article is based on the information that is currently available and is subject to change.