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Financial Reporting and Regulatory Update

Third Quarter 2020

Navigating the Impact of PPP and Government Assistance

How should financial executives prepare for any new rounds of assistance? In this Q&A, Sean Prince, a Managing Director in Crowe's Assurance Professional Practice, discusses the top issues financial executives need to consider as they prepare their accounting for government pandemic assistance.

Financial Education & Research Foundation (FERF): Thanks, Sean, for joining us – really appreciate your taking the time. Maybe we can kick it off with you describing your background and your role at Crowe.

Sean Prince: Sure. Thanks, Chris. My name is Sean Prince. I am a managing director in the assurance professional practice of Crowe. I help advise our audit and advisory engagement teams on complex accounting issues. And of course, as the topic of this podcast alludes to, I help spearhead our firm’s response to COVID-19 pandemic accounting and financial reporting related issues.

FERF: It’s certainly timely given all the discussion that’s happened over the past couple months regarding government assistance. But I want to start off with a discussion about looking at the year-end close. What are the top issues financial executives need to consider when they’re preparing their accounting for government pandemic assistance they received?

Prince: Let me answer this question from two different angles. First, let me suggest that when it comes to government assistance, financial executives need to be thinking not only about the financial reporting and accounting implications but also about regulatory reporting requirements. And so while organizations have been happy to receive assistance during these challenging times, each receipt of government assistance probably comes with new or enhanced reporting requirements – reports to show that you’re qualified for the funds, that you’re using the funds appropriately, and how you’ve determined that you’ve used the funds appropriately.

Now, this is pretty critical because failure in the regulatory reporting aspect of things could potentially result in the loss of funds.

So the first point I’d make is that financial executives need to view their responsibility toward government assistance to include not only financial reporting aspects but also the regulatory reporting requirements. And I think it could broaden even further to reporting for debt covenant compliance, internal reports used by management, and so on. In other words, just make sure you’re taking a holistic approach.

And so as we’re approaching this year-end close, you want to ask questions like: What processes do we have in place to address both of these aspects? Do I have the right personnel in place? The right tools? Are the channels of communication open between the relevant parties and my business? Are those that are actually applying for the government assistance talking to those who have to account for and report on it? This brings me to the other angle I wanted to answer your question from.

As we’re approaching year-end, you’re asking what financial executives need to be focused in on. And I’m going to throw out there something I call the two Cs. The first C of my two Cs is completeness. How do you make sure you’ve identified all the different forms of government assistance the organization is benefiting from? You’ve got tax credits all the way to Paycheck Protection Program or what’s referred to as PPP loans. Remember, you need to look beyond just federal assistance. You’ve got to consider the possibility that the organization could be receiving state and local government assistance as well. So the question for the executives is what actions need to be taken to determine the full population of assistance that your organization is receiving.

That’s my first C: completeness. But once you have your arms around the full population, that takes you to the next of my two Cs, which is clarity. And clarity is really multifaceted. The first thing you need to get clear on are the terms of each form of government assistance received. What are the eligibility criteria for this form of government assistance? What are the terms of use? How can the funds be used? How can they not be used? And clarity on the regulatory reporting requirements after the fact: What does my organization need to be tracking? What processes and controls do I need to put in place to make sure I have appropriate data to ultimately report in accordance with the terms of the government assistance?

And then another facet of clarity is you can’t appropriately account for something if you don’t understand it. If you don’t know what the terms of your government assistance are, we can’t say that you know how to account for it. But this is kind of a tricky area, because for some forms of government assistance, especially during this COVID-19 pandemic, the terms of the assistance actually might still be evolving.

Let me use an example – and this one’s probably close to home for a lot of folks that are listening in. The terms and forms and applications that are used with respect to this Paycheck Protection Program have been evolving. And as recently as early October of 2020, a new form used for forgiveness was released.

As recently as September 2020 some substantive or big changes were being made to the terms of government assistance.

I guess the long and the short of it is that finance executives need to determine how their organization will stay clear on all of the terms and conditions of these programs. Number one, to make sure they’re eligible. Number two, so that they can maximize their compliance with the terms of the programs. And number three – coming full circle here with your question – to make sure they are able to accurately reflect the government assistance in their financial reporting.

Let me address another form of clarity that’s quite important regarding the receipt of government assistance by for-profit organizations. Our listeners may be aware that U.S. GAAP doesn’t explicitly address how for-profit entities should account for grants received from governmental entities. While there is some guidance out there for some forms of government assistance, there’s clearly a lack for other forms. And so this leaves organizations with the need to make sure they’re clear on how to navigate the accounting guidance for those forms of government assistance for which accounting guidance doesn’t exist.

And so I’ll go back to the famous PPP loan program. Given that a PPP loan is legal-form debt, PPP loans can always be accounted for as debt. That’s always an option for recipients of PPP loans, but what about the substance of the arrangement? What about an organization that thinks it’s going to receive full forgiveness of the entire PPP loan such that, in substance, the PPP loan feels much more like a grant versus debt? What do you do in that circumstance? And that’s where the accounting professionals need to understand and be clear on which guidance they can analogize to. Fortunately, for PPP loans, the AICPA [American Institute of CPAs] has issued some helpful guidance in the form of a TQA [technical questions and answers]. And we’ve also gotten helpful guidance from the AICPA on certain of the healthcare-related government assistance programs.

But again, coming back to where I began, it’s important that financial executives have clarity, not only on the terms of the government assistance but also on the related accounting guidance and requirements. So in summary I’d say, keep in mind the two Cs.  First, completeness. Make sure you understand the full population of government assistance your organization is receiving. And then the other C is clarity. And approach it all holistically – not only from the accounting angle but also in terms of the regulatory and perhaps even internal reporting requirements.

FERF: That’s a lot to absorb, and you certainly took a view from the broader perspective of people in the financial suite – financial executives working on the reporting around it. You mentioned a little bit with healthcare. What about specific industries? Which industries do you feel have the most work when it comes to dealing with this sort of government assistance, accounting, and regulatory change?

Prince: I think that’s a great question. Let me again use PPP loans as an example. And I’ll start from the borrower’s perspective. Ultimately, the accounting issues for PPP loans are essentially industry agnostic. PPP loans were open to virtually any industry, maybe except the banking industry, but let me take the question just from a little different angle. One could argue that the accounting issues for these PPP loans are most complex for for-profit entities, because as I was alluding to earlier, if they decide to not account for the PPP loan as debt, then they find themselves having to look elsewhere in the accounting guidance. They’re going to have to apply some guidance by analogy, for example, Subtopic 958-605, which was generally a not-for-profit standard but addresses specifically how to handle government grants.

We’ve also even seen entities analogize internationally – to international financial reporting standards, specifically IAS [International Accounting Standard] 20. And that’s a specific standard developed by the IASB [International Accounting Standards Board] on how to account for government assistance. The challenge here – and this is why I think PPP loan accounting for for-profits can be a little challenging – is the accounting outcome for a PPP loan can vary widely even under these three approaches that I’ve thrown out there, whether you account for it as debt or under this not-for-profit guidance or IAS 20.

And so, because for-profit entities may be using one of a handful of different possible accounting paths, there’s going to be diversity in practice. We’re going to see a lack of comparability, even across peer companies in the same industry. One might be applying IAS 20, one might be applying the debt model, and another might analogize to the not-for-profit guidance. There’s two points I think that fall out from this discussion. The first point is we’ve observed that diversity exists even for entities that are applying the same standard to their PPP loan. For example, let’s take IAS 20. IAS 20 allows a reporting entity to present the income statement impact of loan forgiveness for the PPP loan either as income or as a reduction of the related expenses like payroll and rent and utilities. So for entities that have elected to analogize the IAS 20, you’re going to see diversity in practice.

Similarly, we’re seeing entities that are applying the not-for-profit guidance to PPP loans – diversity in practice as to when they’re recognizing loan forgiveness. Some are deferring recognition of loan forgiveness longer than others due to the uncertainty as to how the SBA [Small Business Administration] will audit entities who have received PPP funds. Some are viewing that audit requirement as administrative in nature, whereas others are viewing it is as a substantive condition to receiving forgiveness. So again, big picture here is we’re seeing a lot of diversity, and this diversity leads me to a second point I want to make. Given the diversity in practice, entities really need to make sure they have adequate disclosure around their accounting policies as well as the impact the government assistance has had on the financial statements.

FERF: Hearing you describe this, it’s such a massive undertaking, it seems, and involves so many unknowns. Is there any template or past experience that you feel closely resembles the scope and breadth of the accounting issues raised by the PPP or any government assistance right now?

Prince: That’s another interesting question. I’m trying to think of another program that’s been such a moving target as PPP, and that’s the best analogy I can think of – trying to hit this moving target. It’s really hard to nail down the accounting, and the terms for programs are still moving around and evolving, especially when they’re so susceptible to political influence.

Fortunately, I think we have PPP loan accounting pretty much nailed down here, but let me just throw out a few quick observations with respect to your question. First, sometimes we just don’t know how we’ll account for something – any form of government assistance – until the dust settles a bit. We’ve seen this not only for PPP loans but also for forms of government assistance being offered to healthcare entities, for example, during this pandemic. Sometimes we have to play this wait-and-see game. We don’t know how the rules and regulations stemming from the law, like the CARES Act [Coronavirus Aid, Relief, and Economic Security Act], for example, are going to shake out. And so we don’t exactly know who will qualify and what those funds need to be used for and what the reporting requirements will be.

The second observation I’d make is organizations really should find a way to stay plugged into relevant conversations. Given the uncertainty in the system, how can they stay abreast of developments in, say, the accounting interpretations arena? Maybe it’s through involvement with the AICPA, maybe it’s staying tuned to FASB [Financial Accounting Standards Board] meetings, and maybe it’s as simple as just having an open line of communication with your audit firm or accounting adviser and just make sure that you keep apprised of developments.

FERF: This goes into our final thought. You have all this uncertainty with the programs that have already been rolled out. But then you have the uncertainty of what could happen in the future because the pandemic is not over yet. There are lots of discussions about what’s going to happen next. And then you have – as you mentioned – the political question about the changing nature of Congress or the White House. So how should financial executives prepare for any new rounds of assistance, especially given all the political uncertainty going on?

Prince: Maybe the best answer I could give is to make sure that you and your organization are learning from the process that you’ve just gone through for the first couple rounds of assistance. Pause and reflect. Think about what was hard. Let me just run through a series of questions you might ask yourself: Was it hard to determine whether we were eligible for a certain form of government assistance? Was it hard to actually apply for that form of government assistance? Was it hard to set up the relevant reporting mechanisms to make sure we’re capturing all of the relevant data to submit to the governmental entity providing the assistance? Was it hard to figure out the accounting, and why was it? How about the tax implications? Or was it hard to make sure that the funds were used in such a way to maximize our return?

Take PPP loans, for example. How did we make sure that those funds were used for eligible expenses so that we could maximize forgiveness? It’s really a question of where our weak spots were in those first couple of rounds and how we can address those issues now before the next possible round of assistance is received. So I would encourage those listening in today to get their teams together and ask them these types of questions. Where do we need to shore things up? What can we do better next time? Turn it to them because they’re the ones that are on the ground dealing with it.

The other point I’d make is if we just ignore the weaknesses right now, what can you do to optimize this next round of government assistance? How can you turn this into an opportunity – not only from, say, an operational perspective but also from a cash flow and liquidity management perspective for the business? What can you do to take advantage of all of the relevant forms of government assistance that you might be eligible for? So maybe that looks like engaging someone to help you think through tax optimization strategies or cash flow liquidity optimization. I know Crowe offers these and other services to help our clients, but start having those conversations now. Engage who you need to engage to be ahead.

And maybe this is all too optimistic given it’s an election year, but the last point I’d make in that regard is just make sure you’re aware of what’s going on on Capitol Hill. How are you going to stay plugged in? How are you going to keep a pulse of the political agenda?

To summarize, I’d say, identify your weak spots and address them. Talk to your team. Figure out what went well and what didn’t. Next, how can you make this an opportunity for your organization? And then finally, what are you going to do to keep a finger on the political pulse?

FERF: Final question for you, wrapping it up. Is there something about this whole experience over the past six, nine months and the government assistance programs that people should be thinking of broadly or that you don’t think has been talked about a great deal, but should be thought about by financial executives or even the broader audience? Is there anything that you think really isn’t talked about that much but should be?

Prince: Again, a fantastic question. The common denominator, I think, of all of the questions we’ve gone through today, Chris, is uncertainty. There has been a whole lot of uncertainty, and we continue to face uncertainty both from when this thing ends and how politicians are going to respond. But what keeps me optimistic through it all is we’ve done a good job as an industry in resolving these issues as they come. They come, and we have to deal with it. Like any good financial executive, you have to get through it. So as I just said, let’s remain optimistic. I think the way to resolve any issue that comes our way is to keep those channels of communication open with the relevant parties.

I’ve just been thrilled at how well the industry has come together to tackle, say: How do I account for a PPP loan? How do I deal with provider relief funds in the healthcare industry? What kind of relief do we need from a reporting perspective for Main Street lending? Everyone’s working together, and I think everyone can play a role. Financial executives, make sure you speak up and say what the issues are. Talk to your auditors, your accounting advisers, because there’s a lot of work going on every day to help people think through the appropriate accounting and make sure they’re optimizing their use of funds. So again, I’ll just end on an optimistic note. I know everyone listening is clearly smart. They’re investing in themselves by taking the time to listen to this podcast. Let’s keep at it, and we’ll get through this one step at a time.

FERF: Great. Well, it’s nice to go out on an optimistic note. So I want to thank you very much for participating, and thank you for your thoughts.

Prince: It’s been a pleasure. Thanks for having me today.

Have questions about financial reporting for government assistance from programs such as the CARES Act and PPP? Learn more

This Q&A with Sean Prince, Crowe assurance professional practice managing director, regarding the impact of the PPP was recorded for the Financial Executive Podcast in October 2020. The conversation has been edited for brevity and clarity.

 

 

The information in this podcast is not – and is not intended to be – audit, tax, accounting, advisory, risk, performance, consulting, business, financial, investment, legal, or other professional advice. The information is general in nature, based on existing authorities, and is subject to change. The information is not a substitute for professional advice or services, and you should consult a qualified professional adviser before taking any action based on the information. Crowe is not responsible for any loss incurred by any person who relies on the information discussed in this document.