As spring ebbed into summer this past year, the economic impact of the pandemic inflicted severe stress across all economies and geographies. The U.S. government responded with stimulus through various means, including the CARES Act and its now renowned Paycheck Protection Program (PPP) loans. Many state, county, and municipal governments also responded with aid to businesses, including eviction moratoria, grants, and other fiscal aid.
These efforts were well placed, and they have often provided businesses the help needed to pay their teams and to keep their business afloat. The programs have also demanded significant time from business owners, operations leaders, and financial executives.
As 2020 winds down, controllers, CFOs, and CEOs now have another series of decisions to make. That is, whether to record the benefits of these COVID-relief programs in their 2020 income statement or wait and record the benefits in 2021.
Accounting Alternatives for COVID-19 and Their Impact on EBITDA
Accounting principles generally accepted in the U.S. (U.S. GAAP) provide alternatives for the accounting of both PPP loans and rent deferrals and waivers. Each of these alternatives require thorough analysis and, likely, consultation with a qualified CPA. This is an excellent topic for the next conversations that take place between auditors, boards, and lenders.
These alternatives may have a significant impact on a company’s net income and earnings before interest, taxes, depreciation, and amortization (EBITDA), which, of course, may make the difference as to whether a company remains in compliance with its debt covenants and achieves, or fails to achieve, other financially measured goals. When producing financial statements, the alternatives chosen by management are required to be disclosed when the impact is material.
Alternatives in Accounting for PPP Loan Forgiveness
Two models are available to companies for this forgiveness. Under many circumstances, management is able, under U.S. GAAP, to record the benefit of the forgiveness at the same time as the paychecks and other qualifying payments are being made. In other words, the loan forgiveness is recorded as a pickup to EBITDA in 2020.
Alternatively, management can choose to account for the loan as typical debt and record the forgiveness in the month when the lender approves the loan forgiveness, and, for larger loans, after the Small Business Administration (“SBA”) completes a potential audit. For most companies this will be in 2021.
So long as certain technicalities in U.S. GAAP are met, both alternatives are available to many companies and management gets to pick which alternative it prefers.
Alternatives in Accounting for Lease Payment Deferrals and Waivers
This article focuses on lessees, but the alternatives are also available to lessors. In April 2020, the U.S. GAAP rule maker (the Financial Accounting Standards Board) issued accounting guidance addressing rent relief caused by the pandemic. In a nutshell, this guidance provides companies two alternatives. The first alternative is to record the benefit of any rent deferrals or waivers in the month that payments are changed by the waiver or deferral. These changes would predominantly affect 2020, increasing 2020 EBITDA. Under this alternative, any deferred rent payments will result in increased expense in the month the deferred payment is paid back. As a result, EBITDA improves in the months of waiver and deferral, and EBITDA declines in the months when deferrals are paid back.
The other alternative is to modify the company’s rent accounting calculations to record the benefit of rent waivers over the remaining term of the lease. This will generally push the EBITDA benefit of the rent waivers into 2021 and beyond. Rent deferrals would not impact EBITDA under this alternative. Instead, the deferred rent would be accrued as a liability which is relieved when the deferral is repaid.
Like the accounting alternatives in PPP loan forgiveness, both alternatives are available to most companies and management can decide which it prefers.
Summary of EBITDA-Impacting Accounting Alternatives
| ||EBITDA increase in 2020||EBITDA increase in 2021
|PPP loan forgiveness||Record the forgiveness in the same period as the qualifying payroll and other expenses are paid.||Record the forgiveness when the loan is forgiven by the SBA.
|Rent waivers and deferrals||Record the benefit of the waivers and deferrals in the months where rent is reduced. Record the payback of rent deferrals in the month of payback.||Spread the impact of rent waivers over the remaining term of the lease. Rent deferrals will have no EBITDA impact under this alternative.
For many companies, these alternatives will have significant impact on their 2020 income statements and EBITDA. Management should consider discussing these alternatives with their accounting advisors, boards of directors, auditors, investors, and lenders before the year end rush begins. If you need further information about these alternatives and their impact on your organization’s EBITDA, please contact a Clark Nuber professional.
For more information on COVID-19 and its impact on accounting standards in 2020, visit our Resource Center.
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