Westfall: 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 C's. The first C of my two C's 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 C's, 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 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 C's. 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.