To say the novel coronavirus or COVID-19 has changed every part of society is an understatement. No area of home or business life remains untouched. This includes the world of accounting, which must adapt and adjust to the many changes that have occurred due to business disruption.
Although the guidelines for financial accounting were established to provide a framework for many situations, nothing could have prepared accountants for what they faced this year. The Paycheck Protection Program and many other adaptions due to the pandemic have raised numerous questions throughout the accounting world.
FASB, AICPA, and other groups have attempted to clarify many of these changes and how to apply them to the fiscal year end. The following provides highlights of the major issues accountants face with reporting this year. Be sure to delve deeply into specific areas of concerns by referring to the specific source documents.
FASB answered this question related to lease concessions. The lessor or lessee can elect to apply or not to apply the lease modification guidance in FASB ASC Topic 842, Leases, and Topic 840, Leases, to those contracts. This election is available for pandemic-related concessions that don’t result in a substantial increase in the rights of the lessor or the obligations of the lessee.
When a deferral affects the timing of the lease contract, but the amount is substantially the same, the accountant can choose which method to use. FASB does not favor one or the other. The two methods are:
- Accounting for the concessions as if no changes to the lease contract were made. In that case, a lessor would increase its lease receivable, and a lessee would increase its accounts payable as receivables/payments accrue. In its income statement, a lessor would continue to recognize income, and a lessee would continue to recognize expense during the deferral period.
- Accounting for the deferred payments as variable lease payments.
FASB did caution, however, that the same method should be applied to similar situations within the same organization if they arise.
The Paycheck Protection Program
The Paycheck Protection Program (PPP), enacted through the Small Business Administration, was intended to help businesses keep people employed during the coronavirus. The loan should be treated as a financial liability. Please refer to Topic 470 for details.
AICPA added further clarification that nongovernment entities should report PPP loans as follows. An entity accounting for the loan would:
- initially record the cash inflow from the PPP loan as a financial liability and would accrue interest in accordance with the interest method under Subtopic835-30.
- NOT impute additional interest at a market rate.
- continue to record the proceeds from the loan as a liability until either (1) the loan is partly or wholly forgiven and the debtor has been legally released or (2) the debtor pays off the loan.
- reduce the liability by the amount forgiven and record a gain on extinguishment once the loan is partly or wholly forgiven and legal release is received.
For more information pertaining to accounting change and challenges brought about by the coronavirus, please see the special SBA Paycheck Protection Resources for CPAs brought to you by AICPA.
No one could have predicted the challenges and changes brought about by a virus. But, with the usual flexibility that seems to be built into the fabric of the nonprofit world, organizations are rising to the challenges and finding ways to cope. This includes accountants who must ensure that nonprofits comply with the ever-changing regulations, guidelines, and programs available. Hopefully, these resources will help you navigate such changes more easily.
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.