Accounting for 2020
Organizations across the nation continue to cope with and navigate the impacts of the COVID-19 crisis. With funding assistance in-hand, many find themselve
How to make sure everything falls in place when nothing goes to plan
Organizations across the nation continue to cope with and navigate the impacts of the COVID-19 crisis. Nonprofits have faced operational disruptions, canceled fundraising events, sources of revenue loss, and funding challenges – all while working to serve their clients and communities in new ways.
As organizations turn to grantors and financial assistance programs in order to maintain operations and fulfill their missions, many find themselves asking how they account for and navigate these relief funds.
To help you continue to prepare for and respond to the financial needs of your organization, we’ve partnered with Atchley & Associates LLP, Certified Public Accountants and Business Advisors, to compile insights and information covering all aspects of funding relief and government loans during today’s crisis.
CARES Act Funding
More on government assistance & stimulus
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides relief funding and economic assistance
to individuals, companies, and nonprofits affected by the COVID-19 crisis.
Payroll Protection Program (PPP)
Established by the CARES Act, the PPP loan allows small businesses and eligible nonprofits to borrow money to pay employee compensation and benefits. Applications were accepted up until August 8, 2020. Borrowers can receive funds up to the lesser of 2 ½ months of payroll expenses or $10 million.
- Funds must be used to cover payroll (up to $100,000 per employee), benefits, rent, utilities, and interest.
- Borrowers must make a good-faith certification that the need for the loan is based on economic conditions,
- Funds will be used to retain workers and maintain payroll and no other funds were received for the same purposes
- Funds must be used during either the 8-week or 24-week covered period for eligible expenses.
At the end of the covered period, borrowers can apply for forgiveness. The amount of the loan forgiven will not be taxable to the borrower, however, the expenses paid with the forgiven amounts will not be deductible.
Did your organization take advantage of CARES Act Coronavirus Relief Options?
- Payroll Protection Program (PPP)
- Economic Injury Disaster Loan (EIDL)
- Acquired relief funds or loans outside of the CARES Act
- All of the above
- None of the above
Emergency Injury Disaster Loan (EIDL)
Administered by the Small Business Administration (SBA), the EIDL loan provides economic relief to businesses and non-profit organizations that are experiencing a temporary loss of revenue. Applications continue to be accepted through the SBA. Eligible small businesses include those with 500 or fewer employees and eligible nonprofits include all nonprofits and faith-based organizations.
Applicants can request a loan up to $150,000
Loan approval based solely on credit score, borrowers do not have to prove they could not obtain credit from other sources
Proceeds from this loan can be used for a wide variety of normal business expenses, including payroll, rent, debts, and other business expenses
EIDL loans have a repayment period of up to 30 years and have an interest rate of 3.75% for small businesses and 2.75% for non-profits. Repayments on COVID-19 EIDL loans are deferred for one year from the date loan proceeds were received.
Is more assistance coming?
Various bills are making their way through Congress that will provide more stimulus and additional assistance, including:
- The Paycheck Protection Small Business Forgiveness Act – If
passed this Act would allow small businesses that received loans
of $150,000 or less to receive automatic forgiveness
- HEROS Act – If passed would reopen and extend the PPP
application period to December 31, 2020, and eliminate the
60% payroll requirement
- HEALS Act – If passed would add another $190 billion to the PPP
fund, expand eligibility, remove the 60% payroll requirement, and
allow businesses to request a second loan. It also provides
five-year liability protection for schools, businesses, and hospitals
from being sued due to coronavirus related illnesses.
Status of Additional Assistance:
Paycheck Protection Small Business Forgiveness Act
Bipartisan bill introduced in Senate late June 2020
Passed by the House of Representatives but stalled in the Senate
Introduced in the House of Representatives early July 2020
Accounting for the CARES Act
What to expect next for PPP loan recipients
With relief in hand, many PPP loan recipients are unsure of how to account for these funds as all or a portion of the loan is forgivable. Is it a loan? Since it is forgivable, is it a grant?
Accounting for a PPP loan as a government grant
A not-for-profit entity has the option to account for a PPP loan as a government grant if it believes a PPP loan represents, in substance, a grant that is expected to be forgiven. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 958-605, Not-for-Profit Entities – Revenue Recognition, the timing of recognition for a contribution received depends on whether the contribution is conditional or not. If conditional, the contribution is not recognized until the conditions are substantially met or waived by the donor or granting agency. Since the PPP loan is only forgiven if certain conditions are met it would be deemed to be a conditional grant.
Accounting for a PPP loan as debt
Not-for-profit entities may also elect to treat a PPP loan as debt if they choose not to account for it as a government grant. Under this method, the proceeds from a PPP loan are treated as a liability and entities accrue for interest expense in accordance with the loan agreement.
We strongly recommend you review more about each of these methods outlined by Atchley & Associates, LLP.
Should you need any additional information we advise you to reach out to your CPA or business advisor.
Applying for Forgiveness
PPP Loan recipients can apply for forgiveness at the end of the 8- or 24-week covered period (based on when loan proceeds were received). To apply for forgiveness, loan recipients must fill out the PPP Loan Forgiveness Application and submit to the bank that processed the loan. The rules for the amount eligible for forgiveness are complicated and we strongly encourage recipients to work with their CPA on the application process.
In general, the following requirements must be met for loan forgiveness:
- At least 60% of loan proceeds used for payroll costs (compensation up to $100,000 per employee plus benefits). If less than 60% is used for payroll, the forgiveness amount will be reduced.
- The average annual salary or hourly wages during the covered period did not decrease by more than 25% for any employee. If there was a reduction, the amount of loan forgiveness may be reduced.
- The number of full-time employees is not reduced during the covered period when compared to either the periods February 15 – June 30, 2019, or January 1 – February 2, 2020, unless one of the below exceptions is met:
- Headcount and wages are restored by December 31, 2020
- Inability to rehire individuals who were employees or restore hours of an eligible employee
- Inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or
- Unable to return to the same level of business activity as prior to February 15, 2020, due to compliance with requirements or guidance issued related to COVID-19
*Up to 40% of the PPP Loan can be used for rent, utilities, and interest of secured debt incurred prior to February 15, 2020.
Loan proceeds received prior to June 5, 2020: borrowers will have an 8-week covered period with an option to extend to 24-weeks.
Loan proceeds received on June 5, 2020, or later: borrowers will have a 24-week covered period.
Auditing for 2020
Does CARES Act funding affect your next Single Audit?
Single audits are required if an organization expends (not receives) $750,000 in either Federal or State Funds, not combined, in your Fiscal or Calendar Reporting Period. As an EIDL or PPP loan recipient you may be wondering how or if these federal funds contribute to or impact your next Single Audit:
Economic Injury Disaster Loans (EIDL) issued by the Small Business Administration are reportable on the Schedule of Expenditures of Federal Awards (SEFA) and are reported for the entire amount received and the value of the loan will stay on the SEFA until it is paid off or forgiven. While these funds alone are unlikely to trigger a single audit, a non-profit might reach the $750,000 as a result of these funds plus other funds expended during the year.
As the Paycheck Protection Plan Funds originate from commercial banks they are not subject to single audit requirements. That being said, the funds may be subject to a compliance audit performed by the bank itself.
What about other Funding?
For both Federal and State funds, it is best practice to check with the grantor if the funds received should be presented on the (SEFA) or Schedule of Expenditures of State Awards (SESA).
- Some funds are considered a fee for services and are not reported on the SEFA/SESA
- Funds do not have to originate directly from a federal or state government agency, they can be passed through different departments or other organizations
Single Audit Reporting – Federal Funds Only
Typically reporting the Single Audit to the Federal Audit Clearinghouse must occur at the earlier of 1) 30 days after the audit is completed, or 2) 9 months after year-end. Currently, under the CARES Act, there is an automatic 6-month extension.
Additional Assistance for Nonprofits
Navigating existing and new funding relief
In our current economic environment, it may be more difficult to rely on traditional fundraising methods (conferences, events, galas, etc) to raise money for your organization. Many nonprofits have implemented new approaches and strategies with existing funders to ensure they continue to have the funding they need to support their community:
> Ask funders if they can further support the organization through financial assistance
- Discuss how COVID has impacted the organization
- Provide information on how the organization has modified operations to continue operating and delivering programs to the community
- Open a dialogue about what has gone well and what the future looks like for the organization
> Ask funders if they can modify grant requirements
- Some program delivery requirements may be difficult to meet due to COVID related local legislation
- Reporting requirements could be extended due to time constraints or maybe delivered electronically instead of via hard copies.
- Fundraising decreases may significantly impact non-program operations so ask if restricted funds can be used for general operations
> Request that future grant payments are sent earlier
- Some organizations receive grants that will be paid out over several quarters. Ask grantors if they would be willing to accelerate payments to meet existing needs. If successful, remember to budget appropriately – this increases funding now it decreases funding in the future.
Accounting for 2020
Maintaining financial management best practices
An organization’s ability to prevent, detect, and correct potential material misstatements have moved beyond essential and become crucial.
Ensure audit-ready financials by maintaining:
- Documented accounting procedures and internal controls that are in place
- Supporting schedules for significant accounts that provide more detail
- Assurance that supporting schedules reconcile to the general ledger
- Readily available invoices, receipts, and other supporting documentation for auditors as they request them
- Finance team availability and responsiveness to auditor requests
Maintaining Internal Controls
Avoid auditor-identified deficiencies, whether material or significant, by maintaining:
- Established control environment
- User and user-level access controls to accounting and financial reporting systems
- Clear transaction entry controls and procedures
- Separation of duties
- Authorization controls of significant transactions
- System-wide and user-level audit trails and logs
- Documented policies and procedures for accounting processes
Tyler Mosley, Partner, Audit Department
Jeremy Myers, CPA Audit Senior Manager
Jaclyn Roberts, CPA Tax Senior Manager
Nicole Oeltjen, Tax Senior
About Atchley & Associates:
ATCHLEY & ASSOCIATES, LLP (A&A) is a full-service CPA Firm in Austin, TX, offering attestation, tax, accounting, business consulting, and political campaign reporting services for more than 20 years. We serve clients in both the public and private sectors.