How BHPH Dealers Can Account for PPP Loans and Lease Concessions
This article originally appeared in The Showroom.
The COVID-19 crisis has presented economic and operational challenges to many businesses, including buy-here pay-here (BHPH) dealerships. BHPH dealers have commonly sought relief through the Paycheck Protection Program (PPP) and through lease concessions from their landlords. While each has provided cash relief, they present unique accounting considerations. For example, how do operators record them in their financial statements?
As of the end of June, banks nationwide have funded most of the $659 billion in Small Business Administration PPP loans, which are forgivable if certain conditions are met. There has been plenty of uncertainty related to loan forgiveness, but now benefactors are faced with a new challenge – financial reporting related to PPP loans. Recently, unofficial guidance was released to address how businesses should account for PPP loans due to a lack of authoritative guidance. The guidance provides loan recipients two primary options.
Accounting Treatment Options
If a business has an accounting policy in place to account for government grants, they should first consider whether the existing policy will be used to account for the PPP loan. Otherwise, the following options should be considered:
- Account for the PPP Loan as Debt: This method can be used regardless of the repayment or expected forgiveness of the PPP loan. In this option, a business should accrue interest at the stated interest rate over the life of the loan. Once the loan is approved for partial or full forgiveness, the business would reduce the loan and accrued interest by any amounts repaid and recognize a gain on the income statement for any amounts forgiven.
- Account for the PPP Loan as a Government Grant: If the company expects to meet the forgiveness eligibility requirements and concludes that, in substance, the PPP loan represents a grant that is expected to be forgiven, it should account for the loan as a government grant. This model may have been used by businesses for prior grants and therefore could be considered for the PPP loans. When the cash inflow from the PPP loan is received, the business would record a liability, which would remain on the books until the grant proceeds are realized or realizable (i.e., approved for forgiveness in part or whole), at which time income would be recognized.
Currently, the most conservative and likely most widely accepted accounting treatment for PPP loans would be to record them as debt under the first option above. However, as more information becomes available related to the forgiveness of PPP loans, the second option above may be appropriate. Therefore, BHPH dealers will need to exercise professional judgement in determining the accounting treatment and policies that are most appropriate for the facts and circumstances related to their loan. Dealers should also maintain documentation to support the conclusions they reach and their accounting treatment for the PPP loan, as well as other government assistance.
Financial Statement Disclosure Requirements
Currently, there are no specific disclosure requirements for PPP loans in published financial statements. However, the disclosure requirements relating to the specific options above would be applicable once the accounting treatment is determined. Businesses should also disclose the significant terms of the PPP loan and the accounting policy for the PPP loan. Disclosure should also be made for any potential contingencies or repayments that may be applicable given the audit terms under the PPP loan agreements.
The accounting governing body, the Financial Accounting Standards Board (FASB), issued a Q&A on lease concessions granted as a result of the COVID-19 crisis. For lease modifications due to COVID-19, businesses have the option to not apply the lease modification accounting guidance if concessions do not result in substantial increases in the rights of the lessor or the obligations of the lessee. If the option is applied, businesses would need to apply it to each group of similar leases (i.e., auto, real estate, etc.) but can make different elections for each group. Appropriate disclosures related to the options selected must be included in the financial statements.
A common lease concession granted to businesses has been the deferral of rent payments. Two accepted methods to account for the deferred rent payments are as follows:
- Record the rent payment as a liability and rent expense for the amount which would have been paid.
- Record the rent payment once the cash outflow occurs, as if they are variable lease payments, just as if no deferral occurred.
If businesses have other unique concessions, significant changes to current leases, or several types of leases (e.g., auto, real estate, etc.), they should consult their accounting or assurance advisor; accounting for lease modifications has many considerations that are dependent upon the facts and circumstances of the individual lease.
KSM Can Help
As BHPH dealers continue to respond to the challenges presented by the COVID-19 crisis, whether dealing with accounting treatment for PPP loans and lease concessions, calculating PPP loan forgiveness, or navigating other issues that arise, we are here to help. Please reach out to your KSM advisor or complete this form.
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