Closing the Books in a COVID-19 Reality

By Scott Stern, PA, CCIFP, Grassi Advisors & Accountants On Jan 5, 2021

While so many things that began have been postponed, cancelled or stalled since the COVID-19 pandemic, closing the books is a reality all business owners must face. Yet, when closing out 2020, this routine practice will look nothing like past years. 

Accounting for PPP Loans 

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

Fortunately, the American Institute of CPAs (AICPA) recently issued guidance that sets forth accounting method options that borrowers can use to report PPP loans. 

Though its legal form is debt, a PPP loan may be considered a government grant in substance. For-profit entities can account for the funds in one of the following ways: 

Loan: 

Loan funds will accrue interest under FASB ASC 835-30, and additional interest should not be imputed even though the rate is below market. 

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. 

Once the loan is forgiven in whole or in part and the borrower is legally released, debit Loan Payable and credit Gain on Extinguishment. 

Once the borrower pays off the loan, debit Loan Payable and credit the Cash account. 

Governmental Grant: 

Do not recognize assistance until the borrower has reaso∑nable assurance (similar to “probable”) that conditions will be met and assistance will be received. 

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. 

When the entity receives the funds, debit the Cash account and credit Deferred Liability. 

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: 

Earnings impact is recognized when all contingencies related to receipt of the assistance are met and the gain is realized or realizable. 

When the business entity receives the funds, debit the Cash account and credit Loan Payable. 

When all contingencies are met and gain is realized or realizable, debit Loan Payable and credit Gain. 

Conditional Contribution: 

Contribution is conditional given the requirements of forgiveness, so earnings should not be recognized until requirements are substantially met or explicitly waived. 

Once the business entity receives the 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: 

Loan: 

Interest should be accrued under FASB ASC 835-30 and additional interest should not be imputed even though the rate is below market. 

Derecognize liability under ASC 405-20-40-1 only when either the loan is forgiven in whole or part and the borrower is legally released (debit the Loan Payable and credit Gain on Extinguishment) or the borrower pays off the loan (debit the Loan Payable and credit Cash). 

Conditional Contribution: 

The contribution is conditional, given the requirements of loan forgiveness. Do not recognize earnings until requirements are substantially met or explicitly waived. 

Once the nonprofit receives the funds, debit Cash and credit Refundable Advance. 

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

The Securities & Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) 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. 

Other Year-End Considerations 

In addition to PPP funds, COVID-19 brought other changes that will affect the way businesses close their books this year, including: 

New accrued expenses, such as facemasks, plexiglass, sanitization and workplace redesign, will need to be added to the balance sheet. 

Many companies are receiving government aid for the first time ever, bringing new reporting requirements and lost tax exemptions. 

While recovering from COVID-19-related losses, businesses may have had cancellations of debt that will need to be accounted for and treated as taxable income. 

The current economy may have caused outstanding receivables and inventory levels to be far from what the business planned.

About the Author 

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

To access more business news, visit NJB News Now.

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