This publication was updated on September 18, 2020, to add disclosure considerations related to various provisions of the CARES Act. Text that has been added or amended since the publication’s initial issuance has been marked with a boldface italic date in brackets. See the appendix for a list of affected sections.
CARES Act, Title I, “Keeping American Workers Paid and Employed Act.”
CARES Act, Title IV, “Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy.”
The CARES Act permits borrowers to refinance EIDLs made between January 31, 2020, and the date on which loans under the PPP are made available.
North American Industry Classification System Code 72, “Accommodation and Food Services.”
As stated on the Small Business Administration’s Web site, its Section 7(a) loan program is its “primary program for providing financial assistance to small businesses. The terms and conditions, like the guaranty percentage and loan amount, may vary by the type of loan.” The PPP is a new Section 7(a) loan option.
The requirement that a borrower “[u]se alternative financial resources . . . before seeking financial assistance” is often referred to as the credit elsewhere requirement.
For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”
ASC 835-30-15-3 states, in part, that “[w]ith the exception of guidance in paragraphs 835-30-45-1A through 45-3 addressing the presentation of discount and premium in the financial statements, which is applicable in all circumstances, and the guidance in paragraphs 835-30-55-2 through 55-3 regarding the application of the interest method, the guidance in this Subtopic does not apply to . . . (e) [t]ransactions where interest rates are affected by the tax attributes or legal restrictions prescribed by a governmental agency (for example, industrial revenue bonds, tax exempt obligations, government guaranteed obligations, income tax settlements).”
After a PPPL’s origination, a lender or investor may determine that the loan has met the conditions for forgiveness and becomes a loan receivable from the Small Business Administration. However, we believe that this determination would only affect presentation and disclosure. [Footnote added May 1, 2020]
This does not include EIDLs; however, EIDLs may be refinanced into PPPLs that are forgivable.
Procedures and Minimum Requirements for Loans to Air Carriers and Eligible Businesses and National Security Businesses Under Division A, Title IV, Subtitle A of the Coronavirus Aid, Relief, and Economic Security Act.
This is in addition to any such interests issued under Section 4117 of the CARES Act, which indicates that the U.S. Treasury Department “may receive warrants, options, preferred stock, debt securities, notes, or other financial instruments issued by recipients of financial assistance under [Subtitle B of the CARES Act] which, in the sole determination of the Secretary [of the U.S. Treasury Department], provide appropriate compensation to the Federal Government for the provision of the financial assistance.”
We do not believe that these loans have any government grant components. Rather, the impact of any interest or other terms that do not reflect market terms would be reflected in the subsequent measurement of interest expense.
EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement.”
Although this section focuses on warrants and other equity interests issued to the U.S. Treasury Department under Section 4003(d) of the CARES Act, it is also relevant to any such instruments issued under Section 4117 of the CARES Act.
This guidance applies regardless of whether the warrant meets the definition of a derivative instrument in ASC 815-10.
While it is expected that loans or debt obligations will be made under this provision of the CARES Act, there is no specific prohibition on the issuance of equity securities.
Section 13(3) of the Federal Reserve Act (12 U.S.C. Section 344) allows the Federal Reserve to extend credit to nonbank financial firms under certain conditions.
In a modification that is not accounted for as an extinguishment, the borrower does not have a new eligible date to elect the FVO under ASC 825-10.
To meet the conditions for sale accounting, the transfer of a participating interest must represent a “true sale.” Furthermore, the transferee (or beneficial interest holder in the transferred financial asset) must have the ability to pledge or exchange its interest. Lastly, the transferor cannot maintain effective control over the transferred financial asset or any beneficial interest in that asset.
A primary dealer is a bank or broker-dealer that is permitted to trade directly with the Federal Reserve.
FASB Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments.
A financial institution is not a defined term in the CARES Act or GAAP. Entities may need to discuss whether they are within the scope of Section 4013 of the CARES Act with their legal counsel.
The applicable period for loan modifications means the period beginning on March 1, 2020, and ending on the earlier of (1) December 31, 2020, or (2) the date that is 60 days after the termination date of the national emergency declared by President Trump under the National Emergencies Act on March 13, 2020, related to the outbreak of COVID-19.
The Board of Governors of the Federal Reserve System, the FDIC, the NCUA, the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau, and the State Banking Regulators.
Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (revised April 7, 2020).
The CARES Act states that the relief applies to an “insured depository institution, bank holding company, or any affiliate thereof.”
SEC Staff Accounting Bulletin (SAB) No. 74 (codified in SAB Topic 11.M, “Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period”).
The optional temporary accounting relief related to TDRs that is discussed in the Optional Temporary Accounting Relief section may not be applied by borrowers.
Special rules also apply for partnerships and short taxable years in 2019 and 2020. For additional information, see Deloitte’s COVID-19 Stimulus: A Taxpayer Guide.
FASB Accounting Standards Update No. 2019-12, Simplifying the Accounting for Income Taxes.
See ASC 958-605-15-6(d).
International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.
FASB Proposed Accounting Standards Update, Disclosures by Business Entities About Government Assistance.
Advance payments from Medicare will be recovered from the health care provider starting 120 calendar days after a payment is issued. Additional information is available at https://www.cms.gov/files/document/accelerated-and-advanced-payments-fact-sheet.pdf.