A key part of the Coronavirus Aid Relief and Economic Security (CARES) Act, the Paycheck Protection Program (PPP) authorized banks to provide low interest rate loans to businesses with a guarantee from the Small Business Administration. Best of all, PPP loans may be eligible for tax-free forgiveness if the proceeds are used for certain approved expenditures. This raises questions about how to present PPP loans in year-end financial statements and how to treat a loan that was forgiven. While U.S. GAAP does not provide specific guidance for PPP loans, there are a couple of options available for reporting the PPP loan on financial statements.
Option 1: FASB ASC 470: Debt
Under this option, entities record the loan as a liability on the balance sheet and interest is recorded as it would be with any other financing arrangement. After the company has applied for loan forgiveness and has been legally released from the debt, the company will record a gain on extinguishment of debt. This gain should be recorded as an extraordinary item and excluded from operating income.
Option 2: FASB ASC 450-30: Gain Contingency
Under ASC 450-30, the earnings impact is recognized when all contingencies have been met and the gain related to the forgiveness of the PPP loan is realized or realizable for nongovernmental entities. The proceeds from the loan are initially recorded as a liability until the proceeds are realized or realizable. Once they are realized or realizable, the earnings impact is recorded. There is less specific on guidance on this method than ASC 470, and it is generally not preferred.
Financial Statement Disclosures
Disclosures under ASC 470 will be similar to traditional debt disclosures. Under ASC 450-30, there are no specific disclosure requirements. It’s important to note that material PPP loans should adequately disclose all key terms of the loan in the notes to the financial statements.
Which guidance to follow on presentation of the loan is ultimately up to management of the company. The PPP loan should be presented on the company’s balance sheet and after it is forgiven, it will need to be recognized outside of operations as other income or as a gain on loan forgiveness. Contact an Anders advisor below to discuss financial statement presentation or recovery options,
Our advisors are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed on our COVID-19 Resource Center. Tune in to our video series PPP with Paul and Dan to learn more about the Paycheck Protection Program.
Companies that provide employee benefit plans (EBPs) may be familiar with the auditing process required by the Department of Labor. Generally, employee benefit plans with 100 or more participants are required to have an independent audit as part of their obligation to file the annual report Form 5500. An annual audit may be an unavoidable cost of doing business, but it does not need to be a cumbersome process.
You Need an Employee Benefit Plan Audit, Now What?
One of the most important duties of a plan sponsor is to hire a qualified certified public accountant. Hiring a qualified auditor helps to protect the assets and financial integrity of the plan and ensures that plan sponsors and various service providers fulfill their fiduciary responsibilities to the plan and plan participants. A qualified auditor also helps keep the plan in compliance with a variety of regulations, which can save the company from penalties being assessed by the Department of Labor (DOL) or possible lawsuits by plan participants.
Finding the Right Auditor
Even though a plan undergoes an audit, the audit may be deficient due to the selection of an inexperienced auditor. It is important to work with an auditing firm that has depth of experience conducting plan audits. The more technical training and experience an auditor has with employee benefit plan audits, the more familiar they are with compliance requirements, plan operations, and specialized auditing standards. Be sure to inquire about the type and amount of benefit plan audit training members of their team receive annually.
To ensure you have an experienced auditor, you may want to discuss their work with other employee benefit plan clients to ensure they are well versed in your plan type. You may also inquire if the auditor is a member of the AICPA’s Employee Benefit Audit Quality Center, which is a national network of CPA firms that demonstrate commitment to employee benefit plan audit quality.
For these reasons, the selection of an experienced and reliable auditor is very important. Anders can help you and your plan administrators comply with key ERISA, DOL and IRS requirements. Our audit experience includes single and multi-employer defined benefit, profit sharing, 401(k), ESOP, and health and welfare benefit plans, as well as public employee retirement systems. Contact an Anders advisor below to learn more.
Organizations with loan compliance responsibilities probably came back to work to begin the new year fine tuning a game plan to submit a clean Home Mortgage Disclosure Act (HMDA) Loan Application Register (LAR) by March 1st. While our compliance professionals perform HMDA reviews and field HMDA questions throughout the year, each January comes with a renewed focus on what loans should be reported and how to ensure that each entry is consistent with information that can be found in the loan file. With this in mind, we’re diving into frequently asked questions around HMDA reporting to help make the process easier.
WHY IS HMDA SUCH A HUGE CHORE AT THE BEGINNING OF EACH YEAR?
Gathering data for HMDA can be cumbersome because an incredible amount of information must be reported to a high level of precision for each application. While the integrity of your HMDA data might not be top of mind throughout the year when other more pressing matters require your attention, integrating HMDA reporting into your everyday processes and scrubbing data throughout the year will result in fewer surprises to manage when the pressure is on to submit data by the March 1st deadline. Add to this the fact that Regulation C requires quarterly recording of HMDA data in a format that can be provided to examiners upon request and it just makes sense for HMDA to be a year-round effort rather than a February fire drill.
THE HMDA THRESHOLDS KEEP CHANGING, DO WE HAVE TO SUBMIT 2020 DATA?
The HMDA rules have been in a permanent state of flux with both permanent and temporary reporting thresholds on the move. The latest adjustment became effective July 1, 2020.
Keep in mind that there are separate thresholds for both closed-end credit and open-end credit, so you may have to report one but not the other, both, or neither. For 2020, the reporting thresholds are as follows:
Closed-End Loans – If your institution originated fewer than 100 reportable closed-end loans in either 2018 or 2019, then you do not have to report applications for closed-end loans with an action taken date in 2020. This threshold became effective July 1, 2020 and was an increase from 25 loans. If you would have been a reporter had the threshold remained at 25 but are not a reporter with the 100 loan threshold, then you still need to record data for the first quarter of 2020, but do NOT need to report that data. If you choose to voluntarily report 2020 data, then you must report for the entire year.
Open-End Loans – If your institution originated fewer than 500 reportable open-end loans in either 2018 or 2019, then you do not have to report applications for open-end loans with an action taken date in 2020. The temporary threshold of 500 reportable open-end loans expires at the end of 2021. For 2022 data (reported in 2023), the threshold will decrease to 200 reportable open-end loans in each of the two preceding calendar years.
If you are approaching either of these thresholds but do not exceed them, be sure to keep adequate documentation to support your exempt status should it be questioned.
WHAT KIND OF TOLERANCES ARE THERE FOR HMDA DATA?
Under the Truth in Lending Act, there are allowed tolerances for the annual percentage rate, finance charge and certain closing costs. Unfortunately, Regulation C does not include allowed tolerances for HMDA data except when calculating error rates for certain purposes. In these instances, a tolerance of three calendar days for application dates and action taken datesand a tolerance of $1,000 for loan amounts/amounts applied for and income. Errors that are within these tolerances are not included in the calculation to determine whether the examiners’ sample will be expanded, or resubmission will be required.
Many fields can accept very precise information. For example, the Debt-to-Income (DTI) ratio can be entered to 15 decimal places. If the file contains several documents with similar, but different, DTI ratios you need to determine which document was relied on to make the credit decision. No tolerance applies, so 43% is incorrect if the DTI ratio that was relied on was 42.95%.
WHAT ARE THE CONSEQUENCES IF OUR HMDA DATA ISN’T CORRECT?
While regulatory agencies have many tools at their disposal to encourage compliance with a wide variety of rules and regulations, the two most common that surface in discussions regarding HMDA are civil money penalties (CMP) and resubmission.
With the implementation of the new rules in 2018, punitive measures such as these have not been commonplace with examiners, allowing for a learning curve so long as a good faith effort to implement the new rules could be demonstrated. That being said, a $200,000 penalty was imposed in 2020 for inaccurate reporting on 2016 and 2017 LARs. Error rates for both years exceeded 30% and this same institution incurred a $34,000 penalty in 2013 for errors on its 2011 LAR.
Error rates that could trigger resubmission can be found in the HMDA Examination Procedures and are dependent on the number of entries on the LAR and calculated separately for each data field, such as loan purpose, action taken and income. A sample of the error rates that could result in resubmission are summarized below. When determining what is an internally acceptable error rate for your institution, these are a good place to start.
# of Entries
101 – 130
131 – 190
191 – 100,000
Keep in mind that HMDA data is publicly available, so it’s accessed not only by various governmental entities, but also by the media, community groups, academicians, other financial institutions and anyone else who may be interested. Should any of these groups approach your institution with questions about your HMDA data do you want your response to be that the data is not accurate?
SHOULD WE REPORT THIS AS A DENIAL OR AS A WITHDRAWAL?
Unaccepted counteroffers can be a problem area for many institutions. One of the most common scenarios we see is an appraised value that does not support the original amount requested. The institution then counteroffers with a lower loan amount. If the applicant accepts and the loan is originated this is easy, the amount of the originated loan is reported, but what if the applicant does not accept the counteroffer? We often see this reported as a withdrawal; however, the Official Interpretations to Regulation C by the Consumer Financial Protection Bureau state that when “the applicant declines to proceed with the counteroffer or fails to respond, the institution reports the action taken as a denial on the original terms requested by the applicant.”
SHOULD WE REPORT ANY LOAN IF THE COLLATERAL IS A DWELLING?
The answer to this question became more complicated when the current set of rules became effective with 2018 HMDA data. The first consideration is the closed-end and open-end thresholds discussed earlier in this article. If those thresholds have been exceeded, the next consideration is the type of loan, such as consumer, commercial, or agricultural. These rules apply equally to originated loans and to applications for these loans that do not result in origination, such as denials and withdrawals.
Consumer Loan Reporting
Consumer loans that are secured by a dwelling will be reported unless they meet one of the exclusions in the rule, the most common of these is temporary financing. A bright line loan term (six months, one year, etc.) does not exist, rather the Official Interpretation to Regulation C states that a loan is excluded as temporary financing if it “is designed to be replaced by separate permanent financing extended by any financial institution to the same borrower at a later time.” Construction loans, are the quintessential example of temporary financing that is not reported on the LAR.
Commercial Loan Reporting
Commercial loans that are secured by a dwelling must meet the definition of a home purchase, refinance, or home improvement loan under Regulation C. Only a portion of the loan proceeds need to be for one of these purposes for the loan to be included on the LAR. Home purchase loans are those that are to purchase a dwelling and that are secured by a dwelling. The dwelling that secures the loan does not have to be the dwelling that is being purchased. Home improvement loans are those that are to repair, rehabilitate, remodel, or improve a dwelling or the real property where a dwelling is located. Refinance loans are those that satisfy and replace and existing dwelling-secured loan by the same borrower. Finally, the temporary financing exclusion discussed above for consumer loans also applies to commercial loans.
Agricultural Loan Reporting
Agricultural loans are excluded from HMDA reporting if either the loan proceeds will be used primarily for agricultural purposes or if the loan is secured by a dwelling that is located on real property that is used primarily for agricultural purposes. Any reasonable standard may be used on a case-by-case basis to make this determination and Regulation C refers to Section 1026.3 of Regulation Z as a source for what constitutes an agricultural purpose.
Preapproval and Prequalification
Preapproval and prequalification requests are another common point of confusion. Refer to Regulation C and accompanying regulatory guidance to determine whether these types of requests should be reported. Regulation C, with some reference to Regulation B (Equal Credit Opportunity), is very specific about what constitutes a preapproval request, which may be reported, and a prequalification request, which is not reported. Do not rely on how your institution labels these requests. When determining HMDA-applicability, refer to Regulation C.
DO I NEED TO DETERMINE IF MY APPLICANT IS PUERTO RICAN OR CUBAN?
No, if the applicant does not provide this information you should not make this distinction based on visual observation or surname. The more detailed ethnicity and race categories such as Puerto Rican and Cuban were introduced with the rules that became effective with 2018 data and are known as disaggregated subcategories. When an applicant indicates an ethnicity of Hispanic or Latino or race of American Indian or Alaskan Native, Asian, or Native Hawaiian or Other Pacific Islander, then the applicant may further identify as one of several subcategories. If the applicant indicates a race of Black or African American or White, then there are no subcategories from which to choose. If the application was taken in person or via electronic media with a video component and the applicant declined to provide ethnicity, race, and sex information, then you must record this information on the basis of visual observation or surname. When doing so, select only from the aggregate categories of Hispanic or Latino or not Hispanic or Latino for ethnicity and American Indian or Alaskan Native, Asian, Black or African American, Native Hawaiian or Other Pacific Islander, and White for race.
I CAN’T FIND ANY GUIDANCE THAT ADDRESSES THIS SITUATION, NOW WHAT?
Look for the most analogous situation in official guidance and apply the same concept to your circumstances. Both the CFPB and the FFIEC have dedicated HMDA pages on their websites. Once you reach a decision, apply it consistently across your LAR. The compliance specialists at Anders are also happy to help walk you through the scenario and reach a conclusion. Finally, this could also be a good time to consult with your primary regulator as they may have encountered a similar situation and already developed an opinion on the matter.
HMDA reporting is constantly evolving and compliance can be difficult to navigate. The Anders team of Banking and Financial Institutions compliance specialists closely follow changes to the HMDA rule and related guidance. If you have any questions or that unique situation that is slowing you down, we’re here to help. Contact Anders below to discuss your unique situation and reporting requirements.
As stay-at-home orders and social distancing have shifted the workforce in many ways, not-for-profits are left with many changes to their accounting and financial reporting environments. Many of these changes were expected, but some changes may have unintended consequences. Pre-pandemic policies were designed to set up effective and efficient controls. However, the controls that were designed may not be effective, or even applicable in the current environment. These changes present the perfect opportunity for management to reevaluate their control environment, begin assessing and updating the risks that lie within that environment, and redesign their policies and procedures.
How to Assess Your Internal Controls
The first and most important step in the process will be assessing where risk lies within the accounting and financial reporting systems. Management should consider where and how fraud or misstatements could occur. Once management knows where the potential risks are, management can insert the needed controls to deter and reduce those risks.
Segregation of Duties
One of the strongest ways to reduce risk is to achieve segregation of duties. This separates the physical custody of assets, record-keeping of the transactions, and authorization of transactions. Under the new normal, segregation of duties may have some barriers that need to be overcome. There are many resources that are available to help achieve better segregation of duties. One example would be using a lock-box to accept deposits. Once the receipt is entered into the lock-box, the accounting department can record the deposit, without having physical custody of any cash or checks. On the cash disbursement side, there are tools such as Bill.com or positive pay to ensure the vendors you want to pay are actually paid.
Strengthen Review Process
Another key control in the internal control environment is review. This can range from the review of KPIs, review of check support, review of bank reconciliations, or financial statement review. However, the review process is only as good as the reviewer. Too often, someone is going through the motions of the review, mainly as they are not exactly sure what they should be looking for. It is key that the reviewer has proper expertise or training. For example, while reviewing the bank reconciliation, they should review the list of payments, outstanding checks and other reconciling items and any other transactions that hit the cash account and reconciliation. The person tasked with the review should be familiar with the organization’s vendors so they would recognize any irregular payments.
As not-for-profits typically have a robust board and other oversight committees, such as a finance committee, the reviewer should have a great deal of organizational knowledge and some accounting knowledge. Typically, the chair of the finance committee, or treasurer of the board would handle the review process. It’s also key to get that person involved in developing the processes so they are aware of the level of detail and review required.
For many organizations, some degree of remote work may be permanent. The amount of physical paperwork that circulates through the office may be significantly reduced, thus the approval process will look differently. Where old procedures would require formal written sign offs, such as initials on the bank reconciliation or signature on the support for cash disbursements, there may not be hard copies of these items to sign with a formal sign off. This is where electronic approval may replace old, hard copy approvals. It is important to note in the electronic approval what was reviewed and what is approved. This can take the form of an email approval to the appropriate personnel, or utilization within various software, such as DocuSign.
The workforce will continue to evolve over the next year, and each evolution should bring new considerations to the control environment. As mentioned above, the first important step is to assess the risk environment. This will be a continual process that management can implement into their daily processes. As each day brings about new changes, it is important to document and apply changes to the environment as they occur.
Organizations that receive greater than $750,000 of federal grants are usually subject to additional audit requirements, commonly referred to as a single audit, or Uniform Guidance audit. The federal government’s response to the COVID-19 pandemic has created some new programs and relief packages for non-governmental agencies, and some may now be subject to the single audit requirement. Here are some guidelines and updates for Organizations that receive federal grants:
Paycheck Protection Program (PPP) Forgivable Loans administered by the US Small Business Administration do NOT count toward the $750,000 threshold and are NOTsubject to the single audit rules.
Provider Relief Funds (CFDA 93.498) administered by the US Department of Health and Senior Services are subject to the single audit rules.
Economic Injury Disaster Loans (EIDL) administered by the US Small Business Administration are subject to the single audit rules.
The US Office of Management and Budget (“OMB”) which oversees these audits, released the 2020 Compliance Supplement on August 18, 2020. When organizations prepare the schedule of expenditures of federal awards (SEFA), they should separately present “COVID-19 Emergency Act funding”. The OMB has indicated there will be no new clusters of programs added for Coronavirus Aid, Relief, and Economic Security (CARES) Act programs, however, the final guidance (to be issued in an Addendum) specifically addressing all federal program under the CARES Act is expected to be issued soon.
Finally, the OMB has issued two formal memos addressing single audit due dates and other administrative matters:
The first memo M-20-11,“Administrative Relief for Recipients and Applicants of Federal Financial Assistance Directly impacted by the Novel Coronavirus (COVID-19),” provided extensions specifically to organizations who are receiving funds under H.R. 6074 for coronavirus preparation and response.
On March 19, 2020, the OMB issued memorandum M-20-17. This memo provides extensions more broadly , and applies to organizations with year-ends through June 30, 2020 that have experienced a loss of operational capacity due to the COVID-19 crisis, and have not yet filed Single Audit reports with the Federal Audit Clearinghouse (“FAC”) as of March 19, 2020. The extension allows for delayed submission of the Single Audit reporting package up to six months beyond the original due date (normally the earlier of thirty days after receipt of the auditor’s report, or nine months after the end of the fiscal year).
The Anders Not-for-Profit Group can help you navigate the evolving regulations so you can always stay in compliance. Contact an Anders advisor below to learn more.
The way most organizations recognize revenue under U.S. Generally Accepted Accounting Principles (GAAP) was set to change this year due to a Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-09. Below we dive into what this means for not-for-profits going forward.
What does this mean for my organization?
For traditional, charitable type not-for-profits, the good news is that pure donations and contributions are considered voluntary and nonreciprocal, or “non-exchange”, and these types of revenues do not fall under the new standard. The standard also provides for some exemptions beyond typical donations. For example, lease and insurance contracts as well as investment income are excluded from the scope of the standard.
What is subject to the new standard?
In contract to the “non-exchange” revenues described above, An exchange transaction occurs when there is a reciprocal transfer between two entities; one of the entities acquires assets or satisfies liabilities by surrendering other assets or services or incurring other obligations. These types of revenues must be evaluated to determine if they are considered “contracts with customers” and are subject to the new standard. Some examples may include, but are not limited to:
Sales of Products and Services
Conferences and Seminars
How should these revenues be recognized?
Once an exchange transaction has been identified to be a contract with a customer, the Organization should follow a 5-step model set forth in the standard for recognizing these revenues:
Step 1 – Identify the contract with the following criteria:
approval and commitment of the parties
identification of the rights of parties
identification of payment terms
contact has commercial substance, and
it is probable the entity will collect consideration to which it will be entitled in exchange for goods/services
Step 2 – Identify the performance obligation and determine if there are multiple performance obligations. Performance obligations are distinct if it is capable of being distinct, customer can benefit from the good or service on its own or together with other resources, and it is distinct within the context of the contract, or the promise is separately stated.
Step 3 – Determine the transaction price
Step 4 – Allocate the transaction price to the performance obligation in the contract
Step 5 – Recognize revenue when (or as) the entity satisfies a performance obligation
What about grants?
We love grants, but truth be told, the accounting for grants often presents a challenge. For years there has been a large divergence in practice among organizations and their accountants on the treatment of grants. In 2018, FASB issued ASU No. 2018-08 to help organizations determine the proper treatment of grants. This standard provides clarifying guidance to evaluate whether a resource provider receives value in return for the resources transferred. Organizations should understand the impact of this ASU when evaluating its grants for applicability of ASC 606.
The world of revenue recognition is complicated. The Anders Not-for-Profit Group can help you navigate the evolving regulations so you can always stay in compliance. Contact an Anders advisor below to learn more.