2020 brought many challenges to individuals and businesses involved in the real estate industry. The industry certainly faced some unique challenges including eviction moratoriums and tenants amid economic hardships. Some things that entities should be considering from a financial reporting perspective right now are noted below.
Generally Accepted Accounting Principles (GAAP) states that property to be held and used should be assessed for impairment if events or changes in circumstances indicate the property’s carrying amount exceeds its fair value (aka, if a “triggering event” occurs). Determining if there has been a triggering event is of course subjective, but events or circumstances could include losses, decreased cash flow, decreased occupancy, expiring leases, and a deterioration in the environment in which an entity operates. The pandemic most likely is a triggering event. If conditions indicate that a property’s carrying amount may not be fully recoverable, an impairment assessment would be required. Entities should discuss the calculation and potential reporting ramifications with their accounting professionals to ensure that any potential impairments are identified early in the year-end reporting process.
The collectability of tenant receivables will need to be considered and an allowance for uncollectible receivables may need to be recorded. In determining if collectability is probable, management should study monthly collection trends.
Paycheck Protection Program (PPP) Accounting
GAAP allows for several different accounting methods to account for the Paycheck Protection Program (PPP) loan. Many PPP loans will qualify for full or partial forgiveness. Businesses should work with their accounting professionals to ensure the loan and forgiveness are appropriately recorded.
GAAP requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued. Substantial doubt exists when conditions and events indicate that it is probable that the entity will be unable to meet its obligations as they become due. The consideration often requires judgment around many factors including the industry and geographic area in which the entity operates, the financial health of tenants, and availability of financing. Early discussion with your accounting professionals is inherent in reaching the appropriate conclusions surrounding going concern.
New Accounting Standards – ASC 842 Leases
While the above items may make the 2020 financial reporting process more complex, there is some good news on the reporting front. The FASB has deferred the adoption of the new leasing standard (more commonly known as either ASU 2016-02 Leases, or ASC 842) until years beginning after December 15, 2021 (calendar year-end 2022) for private entities.
As with all of 2020, the December 31, 2020, financial reporting season will present many additional challenges. If you have questions or need additional assistance, please feel free to reach out to us.
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The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.