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Wednesday, April 8, 2020

COVID-19: Impact to Nonprofit Accounting


Updated April 29, 2020.

June 30 audit season is upon us, and Armanino has put together the following tips to assist our nonprofit community as you think about audit preparation and financial statements in light of the continuing uncertainty with COVID-19.


Underwater Endowments

With the continued uncertainty in the stock market, you may see your nonprofit endowment portfolio impacted to a point where there are not enough or appropriate composition of assets to comply with donor restrictions. Now is a good time to revisit ASU 2016-14 regarding endowment disclosure requirements. When thinking about the 2008 financial crisis, many nonprofits struggled with these types of disclosures or disclosures weren’t as transparent as they needed to be. Make sure you are prepared and don’t fall into this trap again.


Subsequent Events

Nonprofit reporting entities are required to have an accounting policy for evaluating the recognition and disclosure of subsequent events. While some of the impact of COVID-19 may not require recognition in the financial statements, there is certain information that would require disclosure in a note to the financial statements. Examples include decline in fair value of investments, potential impact to sales, collectability of receivables and general uncertainties that could impact near-term accounting estimates.


Accounting for Payroll Protection Program (PPP) Loans

We’ve gotten a lot of questions on how the PPP loans should be accounted for by nonprofits. June 30, 2020, year-end nonprofits will be required to implement the provisions of ASU 2018-08, which will impact accounting for grant and contribution revenue. We believe that the PPP funds will have characteristics of a conditional contribution because there is no benefit to the resource provider, the funds have a right of return attached to them if not utilized for the specified purposes and a barrier to overcome in that the nonprofit organization would have to incur qualifying expenses (payroll, rent, utilities, etc.) for the loan to be forgiven. Therefore, we anticipate nonprofit organizations recording some type of refundable advance on the Statement of Financial Position and a contribution on the Statement of Activities once overcoming the barrier.


CARES Act Implications for Single Audit

Several nonprofit organizations have inquired as to whether funds received from the PPP and other SBA programs are subject to federal audit requirements under the Uniform Guidance. We exchanged correspondence with the SBA Office of Inspector General and it was communicated to us that the PPP is administered under the 7(a) Loan Guaranty Program, whereby lenders disburse private financing for 7(a) loans. Therefore, funds from the PPP are not subject to the Single Audit. It was also noted that certain CFDA program profiles indicate a Single Audit requirement for the 7(a) Loan Guaranty Program. The SBA program office is aware of this and is in the process of updating the CFDA profiles on beta.SAM.gov.

In addition, the SBA Office of Inspector General clarified that the Economic Injury Disaster Loan (EIDL) program is a direct loan program administered by the Office of Disaster Assistance. Therefore, funds received from the EIDL program are considered federal funding subject to the Single Audit and should be included on the SEFA. We also want to note that the correspondence we exchanged with the SBA Office of Inspector General is nonauthoritative. Formal guidance has not been determined or disseminated. It is our understanding that the federal agencies are working with the OMB and SBA to provide clarity on this matter and formal guidance will be issued.

Another question that has arisen is whether payroll costs funded by the PPP can be charged to an existing federal award. A representative from a federal agency confirmed that an organization that receives loan forgiveness under the PPP cannot charge the same payroll costs covered by the PPP as program costs to the original federal program. Given the high volume of questions that have been brought forth from the grants community, we anticipate more formal guidance to be issued in the near future.


Liquidity and Funds Available Disclosures

With the implementation of ASU 2016-14 for nonprofits last year, nonprofits are now required to disclose information about liquidity and funds available for a period of one year from the reporting date. This information was intended to provide transparency to users about liquidity status of a nonprofit organization that is not always readily apparent from looking at the financial statements. With all the uncertainty of the short- and long-term impact of COVID-19, nonprofit organizations are knee deep in cash flow modeling multiple scenarios for their business. These cash flow modeling exercises will also provide valuable information to include in the qualitative and quantitative analysis of the liquidity and funds available disclosure. Now is the time more than ever to ensure your disclosures are transparent.


Going Concern

With accounting rules that changed several years ago, management of all nonprofit organizations are required to evaluate whether there are conditions and events that indicate substantial doubt about its ability to continue as a going concern for one year from the date the financial statements are available to be issued. Management should evaluate several of the factors noted in this memo in addition to obligations coming due, impact to funding and programs, and other resources available that can provide short- and long-term liquidity. If conditions or events exist, there are required disclosures that should be made to the financial statements to be in conformity with the accounting rules.

For regulatory updates and other information on running your organization through disruption, visit our COVID-19 Resource Center.

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