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How Does COVID-19 Funding Affect my Audited Financial Statements?

If you have received funding relating to the COVID-19 pandemic, continue reading because this article is for you. If you haven’t, you may want to enlighten yourself by reading this article anyway. Many tax-exempt organizations have received CARES Act funding from various sources – some are commonly known such as the Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL), and the Main Street Lending Program. However, some are less known such as HHS funding, Higher Education Emergency Relief Funds, and FEMA Emergency Grants.

Your question now maybe, how does all this affect my audited financial statements? Depending if you are a fiscal year or a calendar year may dictate when these amounts are recognized in your financial statements. And since most of these funds are federal dollars, organizations may be subject to Uniform Guidance audits for the first time (formerly known as A-133 audits). Further, some for-profit entities who receive these funds may be required to have a Uniform Guidance audit for the first time.

Now you’re probably asking yourself where to go from here. Keep reading!

Financial Statement Treatment

As with anything, the information in this article is pertinent to the knowledge and details we have at the date of publication. If the CARES Act has shown us anything, it’s to expect change.

Let’s use the example of a PPP loan. This is the most common form of assistance, so we’ll start here.

The accounting guidance on PPP funding is “murky” at best. Organizations have a decision to make on how these funds will be reflected in their financial statements. On May 13, 2020 the AICPA Center for Plain English Accounting issued Accounting in the Fog of War – Treatment of PPP Loans. Although this guidance is nonauthoritative, it is helpful in providing guidance.

First, and most simple, is to recognize your PPP loan as debt in accordance with ASC 470, Debt. The organization would carry the debt at the amount of the advance received until forgiveness has been granted by the financing institution and the Small Business Administration. However, if the organization can assert that there is no more than a remote probability that they will be required to repay the loan, then the entity shifts to ASC 958-605. This hurdle is rather high, as it would require that you are able to demonstrate eligibility and meeting the conditions for forgiveness. While ASC 958-605 is a not-for-profit standard, for-profit organizations may also utilize this guidance. ASC 958-605 would allow the organization to recognize the loan as a conditional contribution, and as barriers are overcome, the organization will recognize the forgiveness as contribution income in the statement of activities/income statement.

If an organization chooses to apply the guidance in ASC 958-605, the organization should assess whether or not they have a liability due back to another funding source. Many not-for-profits are reimbursed for services performed by Federal and/or State agencies. The majority of reimbursement tends to be for payroll costs incurred. To the extent the PPP loan was used to pay payroll costs, it is possible other funders may ask for their money back. This is typically known as “The Double Dip”. In the case of an organization with a state agency or other contract, one could make the case that the organization was reimbursed twice for the same payroll – once thru the State contract and once thru the PPP loan.

Lastly, should your PPP loan be a current or long-term liability? Under the terms of the PPP program, a borrower can take 24 weeks as a forgiveness period and then has ten months after the end of that 24 weeks to apply for forgiveness. No payments are required to be made until the end of that ten months. If that timeline results in no payments required to be made until after your fiscal year-end, the PPP liability can be classified as long-term.

Three things to be aware of:

  1. Once a PPP borrower applies for forgiveness, they alter the timeline, and therefore classification would need to be revisited based on the specific facts and circumstances.
  2. A borrower’s intent to apply for forgiveness does not change the contractual timeline for when payments would be required. It’s only the actual act of applying that alters the timeline.
  3. The expectation that a borrower will receive 100% forgiveness within 12 months does not trigger the need to classify the liability as current. Under GAAP, current vs. long-term is based on required payments, not anticipated forgiveness.

Each organization must make a good-faith determination as to whether recording their PPP loan under the loan accounting rules or under ASC 958-605 is most appropriate under the circumstances. There is no mandated determination and the accounting treatment is facts and circumstances specific. Documentation of the overall accounting position is critical to support the position that is taken.

Uniform Grant Guidance Audit Implications

Currently, we do know that PPP loans will not be subject to Uniform Guidance requirements. However, several other COVID-19 funding programs are also federally sourced dollars and thus associated expenditures may trigger a Uniform Grant Guidance audit. In addition, several new programs were created by the Department of Health and Human Services (HHS) that will be subject to Uniform Grant Guidance audits. The Department of Housing and Urban Development (HUD) expanded existing programs that are also subject to Uniform Grant Guidance audits.

What Do you Need to do Now?

If you are a fiscal year organization, begin internal dialogs with management, finance personnel, human resources, etc. to properly identify all sources of COVID-19 funding received by your organization. We have found that amounts have just been deposited into the organization’s bank accounts without much explanation. Once you have a complete database of all funding received, work with your external auditors to determine what effect the funding will have on your audited financial statements. Uniform Grant Guidance subject your organization to additional administrative requirements, the audits are not free, and the required procedures the auditor most perform can be complex and time-consuming. Keeping the dialog open will enable proper planning.

And as always, Bonadio is here to help. Contact a member of your engagement team or me at jreid@bonadio.com to discuss any questions you may have.

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.