The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27 to address economic instability brought on by the pandemic. The CARES act was written to support individuals and businesses through various types of relief including loans, grants and tax changes. As companies begin to take advantage of these programs, a number of questions have surfaced related to the accounting and financial reporting implications. This article is a summary of some of the most important accounting impacts to date.
The CARES Act includes various loan programs, and caps the interest rate on certain loans to eligible businesses. For some borrowers, the interest rates may be considered below-market. While ASC 835-30, Imputation of Interest, provides guidance for imputing interest when financing is obtained at other-than-market terms, “transactions where interest rates are affected by the tax attributed or legal obligations, government guaranteed obligations, income tax settlements” are specifically excluded under ASC 835-30-15-3(e). Therefore, a company would not be required to impute interest on a below-market interest rate loan from the government.
Funds received through certain CARES Act provisions, such as the Paycheck Protection Program, may be eligible for forgiveness subject to certain restrictions. Forgiveness should be accounted for consistent with other government grant income discussed below. Historically, some companies have applied gain contingency accounting under ASC 450, Contingencies, to similar programs. Under this standard, a company does not recognize income related to the forgiveness until it is realized or realizable. We expect detailed guidance to be available soon.
Government grants and payments for goods and services
Not-for-profit entities will account for non-exchange transactions under ASC 958-605, Not-for-Profit Revenue Recognition, and exchange transactions under ASC 606, Revenue from Contracts with Customers. For-profit entities will also use ASC 606 for consideration received as payment for goods or services, although U.S. GAAP does not provide explicit guidance for situations in which the government is not a customer or paying on behalf of a customer. ASC 105, Generally Accepted Accounting Principles, prescribes the framework to apply when no guidance exists under U.S. GAAP for a particular transaction. Under this framework, companies should first look to apply guidance for a similar transaction within U.S. GAAP by analogy (ASC 105-10-05-2). If no such guidance exists, a company may consider non-authoritative guidance from other sources, such as International Financial Reporting Standards. Two standards that may be applicable by analogy are ASC 958-605 mentioned above or IAS 20 Accounting for Government Grants and Disclosures of Government Assistance. ASC 958-605 specifically excludes transfers of assets from governments to business entities, but that does not prevent a reporting entity from applying the standard by analogy.
The CARES Act includes provisions allowing some companies to defer payroll taxes as well as take advantage of payroll tax credits. Companies that elect to defer payroll tax remittances should accrue the payroll tax liability and recognize the related payroll tax expense in the period incurred. Companies that take advantage of the payroll tax credit available in the CARES act generally should recognize the credit consistent with other government grants as discussed above.
Relief for creditors
TDR accounting relief for lenders
A group of banking regulators issued a joint statement on March 22 indicating that short-term modifications such as payment deferrals, fee waivers, and extensions of repayment terms that are insignificant and related to COVID-19 should not be considered troubled debt restructurings (TDRs). In order to be eligible for this relief, a loan modification must be 1) related to COVID-19; 2) modified between March 1, 2020 and the earlier of 60 days after the national emergency related to COVID-19 ends or December 31, 2020; and 3) executed on a loan that was not more than 30 days past due as of December 31, 2019. The FASB later confirmed that it agrees with the statement and the SEC’s Office of the Chief Accountant (OCA) released a statement noting that the SEC staff would not object to a conclusion that this TDR relief is in accordance with GAAP for the periods in which relief is available. The CARES Act also provides relief to certain lenders for loan modifications made in response to the COVID-19 crisis. There are currently some differences between the joint statement and the CARES Act, and further guidance is expected.
Optional CECL deferral
The CARES Act allows insured depository institutions, bank holding companies, and their affiliates to defer the effective date of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which includes the current expected credit loss (CECL) methodology for estimating allowances for credit losses to the earlier of (1) the date that the national emergency related to COVID-19 ends or (2) December 31, 2020. The CARES Act includes specific criteria for determining whether an institution is eligible for this relief. The OCA released a statement noting that the SEC staff would not object to a conclusion that deferring the effective date of the CECL standard is in accordance with GAAP for eligible institutions. The FASB is discussing the effect of the COVID-19 crisis on CECL, and new developments could occur.
Companies should consider disclosing the impact of any CARES Act provision used or expected to be used if the effect is material or expected to be material. Depending on the individual case, disclosures of significant terms and conditions of government assistance and accounting policies used to account for such assistance may be appropriate.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.