When Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020, they sanctioned much-needed relief payments to healthcare providers across the country. In the nick of time, the CARES Act supplied funds to businesses using:
- The Paycheck Protection Program
- The Provider Relief Fund
- The Medicare Accelerated and Advance Payment Program
These funds helped providers make it through a tough time, but institutions have lingering questions about how to treat these program payments. How should they be accounted for at the onset, and how should they be recorded when loans are paid back or forgiven?
Paycheck Protection Program Funds
The Paycheck Protection Program (PPP) provides loans to small and medium-sized businesses in exchange for keeping their workforce employed during COVID-19-related closures and restrictions. Businesses that meet program criteria are eligible for loan forgiveness, and all others are given two to five years to pay back the funds at a nominal interest rate.
The American Institute of CPAs (AICPA) addressed common questions about how non-governmental businesses could account for PPP loans in their release Technical Question and Answer 3200.18. The AICPA recognized that there are two main viewpoints:
Viewpoint 1: The Loan is Debt that Must Be Repaid
Under Accounting Standards Codification (ASC) 470, Debt, PPP loan recipients that view their loan as debt should record the loan as a liability and accrue interest at the loan’s stated rate. Once the loan is repaid (or if the loan is forgiven), recipients should offset the liability with a gain on extinguishment of the loan. Both nonprofits and for-profit entities can elect this reporting method.
Viewpoint 2: The Loan is a Grant that Will be Forgiven
Entities that expect their loans to be forgiven may treat their loan proceeds as if they were governmental grants analogous with International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance. Under this model, once there is reasonable assurance that all conditions for loan forgiveness are met, the business should record loan proceeds systematically over time, at the same rate they incur the costs that the loan was intended to cover. For-profit entities can elect this reporting method.
Nonprofit entities that expect their loan to be forgiven should record their loan proceeds as conditional contributions in accordance with ASC 958-605, Revenue Recognition – Contributions. Under this standard, the loan would be recorded as a refundable advance and would only be recognized as revenue once the conditions of the loan forgiveness have been met.
Governmental entities are not given the same freedom of choice. As released in the Governmental Accounting Standards Board’s (GASB’s) Technical Bulletin 2020-1, governmental entities should record the loan as a liability and can only release that liability when they are legally relieved from their obligation to pay back the loan. Depending on how quickly the Small Business Administration processes forgiveness applications, governmental entities may need to roll the full PPP loan liability into the next reporting period.
Provider Relief Funds
Relief Funds are available to nonfederal healthcare providers that receive Medicare reimbursements. The funds (up to 6.2% of their fee-for-service Medicare reimbursements in 2019) do not need to be repaid, but recipients must comply with certain terms and conditions.
Nonprofits, private entities, and nonfederal governments will record Provider Relief Funds as non-exchange transactions since the fund provider – the U.S. Department of Health and Human Services (DHSS) – receives nothing of value in exchange. Each entity type will record revenues a bit differently, but in general, revenues will only be reported once the conditions have been met. Private entities have a bit of flexibility; those that follow International Accounting Standards can record revenues when collectability is probable and when they have “reasonable assurance” that they comply with the conditions.
Accepting Provider Relief Funds may also require an entity to commission an audit. When expenditures of federal funds meet or exceed $750,000 in a reporting year, entities must commission a single audit in accordance with the Single Audit Act Amendments of 1996. Single audits are a bit different than financial statement audits and can be time consuming for leaders who are unprepared.
Medicare Accelerated and Advance Payment Program
The Medicare Accelerated and Advanced Payment Program was given an additional influx of cash with the CARES Act, giving more providers the chance to benefit from program funds. This program accelerates Medicare payments when there is a disruption in claims submissions or processing and is typically utilized when there has been a national disaster or emergency. Most providers can request up to three months of Medicare payments, but critical access hospitals can request even more. The recoupment period begins 120 days after disbursement and the full amount is due within 210 or 365 days depending on the type of provider.
Private entities and nonprofits should record advance payments as they would other contracts, with a cash asset offset by a contract liability (like deferred revenue). As claims are recouped (typically from withholding payment on future claims), they can amortize their liability into revenues. Governments should record funds as advance liabilities and will similarly amortize those liabilities into true revenues once Medicare-eligible services are provided.
Same Accounting, New Applications
These principles for recognizing revenue are nothing new, but applying them to CARES Act funds that you receive can feel new and different. If you have questions about how your team is accounting for CARES Act support funds or would like to discuss healthcare or single audits with our team members, reach out to us today.