The coronavirus pandemic spurred the most ambitious federal aid initiatives in recent times, providing programs to support those businesses and individuals most impacted by the swift economic impact. Nearly a year later, and businesses have taken advantage of federal aid in several shapes, from the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDLs) to tax credits and deferred deadlines. This aid was a necessary mechanism to keep businesses afloat but is its own kind of nightmare for accountants and CFOs attempting to balance the books without guidance from generally accepted accounting principles (GAAP).
According to CFO Dive, accounting for government assistance is not covered by the existing GAAP, and many companies are using a wide variety of approaches when tracing federal aid on their financial reports. This is leading to the opposite of the prized uniformity accounting boards have been striving toward in recent years. Instead, major reporting differences in 2020 abound and this has some analysts, such as Moody’s, singling out some methods (specifically, earnings before interest, taxes, depreciation and amortization, or EBITDAC) as debatable1.
While many might wonder why GAAP does not cover government assistance, Vice Chair of the MICPA Corporate Finance Task Force and Vice President of Finance and Purchasing at Hirotec America, Sharon Beetham, posits that providing guidelines for every eventuality might sound sensible but is actually impractical. “It’s hard to have formal guidance on every possible situation,” she explains, adding, “It’s always important to have some latitude to be able to use professional judgement so you can report it fairly based upon your specific circumstances.”
Rather than being forced to follow guidance that may not fit the situation, Beetham, who is also a member of the MICPA Employee Benefits and Business Management & Corporate Leadership Task Forces, states that it is best practice to sit down with stakeholders and decisionmakers to determine the best approach.
“We talked internally about it and decided, in reality, they [the government] were reimbursing us for an expense so it felt appropriate to offset or reduce that expense versus reporting it as other income below the line item,” Beetham says of her company’s process. “We also confirmed with our auditors that they were comfortable with that approach. If they had a different opinion, we may have swayed and moved that data.”
Because determining any approach to accounting for government assistance related to COVID is situational, Beetham believes that so long as there is transparency, even “debatable” approaches might be acceptable for some situations. She advises, “Even though there is no official guidance, as long as you’re disclosing how you’ve reported that information, the user of that data can adjust according to their needs.”
Indeed, financial reports have various users and often those users have very specific needs regarding data from reports that are then plugged in to other reports which maintain consistency throughout an organization. Transparent reporting makes finding and sourcing that information easier and more reliable for its users. Beetham concludes, “So, I think, in my opinion the biggest thing is to be transparent.”
From EBITDA to factoring arrangements, or working out going concern delays – want to discuss pandemic impacts on financial reporting further? Visit MICPA Connect to continue the conversation with other financial professionals.
References:
- Freedman, Robert. “EBITDA, Factoring, Other Issues Leading to 2020 Reporting Differences.” CFO Dive. 11 Mar. 2021. Accessed on 22 Apr. 2021.