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The COVID-19 pandemic has resulted in a widespread reduction in economic activity throughout the United States and the rest of the world. As the importance of social distancing has increased, nonessential businesses have been forced to close, substantially increasing economic uncertainty. With such widespread cessation of economic activity, businesses are struggling to pay employee salaries and benefits, rents, mortgages and a variety of other obligations. In addition, weekly unemployment claims have rapidly increased to their highest level in recorded history. In response to the economic impact of COVID-19, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted on March 27, 2020. The CARES Act includes a variety of relief provisions for businesses and individuals. The relief provided to businesses has raised several questions as to how to account for these benefits.

Accounting for Loans with Below-Market Terms

In certain cases, businesses may receive loans under the CARES Act that are backed by the federal government. These loans may be at terms that are dissimilar to prevailing market terms. As a result, questions have arisen as to whether interest should be imputed on these loans when preparing financial statements. ASC 835-30, Imputation of Interest, provides guidance on imputing loan interest when the terms are different from those prevailing in the market. However, transactions where interest rates are affected by the tax attributes or legal restrictions prescribed by a governmental agency (e.g., government guaranteed obligations) are scoped out of the accounting guidance for imputation of interest. Therefore, businesses receiving below-market loans under the CARES Act would not be required to impute interest.

Accounting for Income Taxes

In instances when there is a change in tax laws during a financial reporting period, ASC Topic 740, Income Taxes, requires the impact on recognized deferred tax assets and liabilities to be recognized in the period in which the change in tax laws is enacted. In the case of the CARES Act, this would be the financial reporting period that includes March 27, 2020. The impact of these changes would be recognized as an adjustment to income tax expense/benefit in the income statement.

The tax relief provided by the CARES Act will likely impact deferred tax assets and liabilities and income tax benefit/expense. Prior to the CARES Act becoming law, businesses were able to carry forward a net operating loss (NOL) to future periods to offset taxable income in those periods. However, the utilization of these NOLs was limited to 80 percent of taxable income. The CARES Act provides relief by allowing NOLs generated in 2018, 2019 and 2020 to be carried back five years and suspends the 80 percent of taxable income limitation for those periods to which the NOLs are carried back. NOLs that are not fully utilized through this limited carryback provision may be carried forward. However, NOLs that are carried forward to tax years beginning on or after Jan. 1, 2021, will be subject to the 80 percent of taxable income limitation. In other words, the suspension of the 80 percent limitation is temporary. If after carrying back these federal NOLs to prior periods a business finds that it has overpaid its tax liability, that overpayment may be used to offset future tax payments to the Internal Revenue Service (IRS), which will provide these businesses with additional liquidity.

As a result of this modification to the NOL rules, beginning in the period of enactment, the realization of deferred tax assets may need to be revisited. Because businesses can carry back these NOLs to certain tax years, valuation allowances that were previously necessary may need to be reduced or eliminated. In other cases, if there is not sufficient taxable income to offset in prior periods, and as a result of the current economic conditions the company does not expect to generate sufficient taxable income in future periods to fully utilize the deferred tax assets, an increase in valuation allowances may be necessary.

In addition, the CARES Act has increased the limit on business interest deductions for certain taxpayers, allowed for recovery of Alternative Minimum Tax (AMT) tax credits through a 2020 refund rather than spreading this refund over future years, and increased the taxable income limitation for charitable contributions from 10 percent to 25 percent, among other tax changes.

Accounting for Government Assistance

Several forms of government assistance are available under the CARES Act. Accounting for government assistance is not specifically addressed by U.S. generally accepted accounting principles (GAAP), and therefore, special consideration of the specific characteristics of the assistance will be necessary to determine the proper accounting. For example, loans, grants, income tax relief, payment for goods and services, etc., are all accounted for differently. Government assistance in the form of income tax relief should generally be accounted for in accordance with ASC Topic 740, Income Taxes. Loans made under the Paycheck Protection Program (PPP) may be forgiven if the proceeds are used to pay certain expenses and other criteria are met. Forgiveness of these loans should not be recognized until the conditions on which forgiveness is predicated have been met. In cases where guidance for transactions or events is not specified within a source of authoritative U.S. GAAP, businesses should first consider other sources within authoritative U.S. GAAP by analogy. If the accounting cannot be applied by analogy to other sources of authoritative U.S. GAAP, businesses may look to nonauthoritative sources (e.g., International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosures of Government Assistance under International Financial Reporting Standards of the International Accounting Standards Board).

Delay or Suspension of Certain Accounting Standards

In addition to providing relief in the form of government benefits, the CARES Act provides insured depository institutions, bank holding companies and their affiliates the option to temporarily delay compliance with Accounting Standards Update (ASU) 2016-13, Financial Institutions – Credit Losses: Measurement of Credit Losses on Financial Instruments. The optional delay begins on March 27, 2020, and ends with the earlier of the date on which the national emergency ends, or Dec. 31, 2020. Further, in certain circumstances, the CARES Act allows financial institutions to suspend the accounting requirements for troubled debt restructurings (TDR) under ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors. The suspension of accounting requirements related to TDRs begins on March 1, 2020, and ends on the earlier of Dec. 31, 2020, or 60 days after the national emergency ends.

Numerous available benefits under the CARES Act are intended to provide relief to businesses directly and indirectly impacted by the COVID-19 pandemic. Businesses will need to evaluate which combination of benefits makes the most sense in light of their specific facts and circumstances. When preparing financial statements, businesses utilizing benefits from the CARES Act will need to consider the impact of these benefits on their financial reporting.

For more information about the CARES Act, reach out to us at

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