In our desire to serve AICPA members in the United States during this pandemic, and the public in general, the following representative frequently asked questions (FAQs) and topics have been compiled to aid (1) practitioners as they perform financial statement audit engagements of health care clients in these uncertain times and (2) health care financial statement preparers. The topics in Part 1 of this FAQ were made available as of August 3, 2020. This FAQ has since been updated to add the topics in Part 2. 
This document provides pandemic-related information on various matters as developed by AICPA staff. Official AICPA positions are determined through certain specific committee procedures, due process, and extensive deliberation. The AICPA staff views expressed in this report are intended to provide member services but not for the purposes of providing accounting services or practicing public accounting. The AICPA makes no warranties or representations concerning the accuracy of information issued. In general, the following perspectives apply to nongovernmental entities, unless otherwise stated.
Paycheck Protection Program (PPP) Loans
What Risks Should We Be Thinking About Now?
The most significant risks related to PPP funds would be as follows:
Ensuring that appropriate documentation is maintained for forgivenes
Ensuring the entity is not double-dipping against other programs (another documentation issue
Being prepared to defend the entity’s certification of need as this has come under scrutiny by the Small Business Administration (SBA), particularly if the entity is receiving other funding sources
The Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) was signed into law on June 5, 2020, which alters the percentage of funds that must be expended for payroll costs for loan forgiveness. Before the act was passed, at least 75% of funds had to be used for payroll costs to be forgiven. H.R. 7010 lowers this requirement to 60%.
What Do We Need to Know About the Forgiveness Calculation?
On May 15, 2020 (revised June 16, 2020, for the provisions of the Paycheck Protection Program Flexibility Act of 2020), the SBA released the PPP Loan Forgiveness Application (application), which can be found here: https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf. The following are a few observations based on a review of this application (more details and guidance from the SBA are forthcoming) as well as the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) that was signed into law on June 5, 2020:
Guidance for Calculating Full-Time Equivalent Employees (FTEs)
The application states that this is based on a 40-hour work week (there had been some question previously about whether it would be based on 30 or 40 hours). Specifically, the average FTE for each employee is calculated as follows: The average number of hours worked per week during the applicable period, divided by 40. This result is then rounded to the nearest tenth (subject to a cap for each employee of 1.0). As an alternative, the application allows borrowers to use an average FTE of 1.0 for any employee who works 40 or more hours per week and 0.5 for any employee who works less than 40 hours per week. The average FTEs for all employees are added together, and the result is the average number of FTEs for the applicable period.
Incurred vs. Paid
The application notes that certain costs do not need to be both paid and incurred during the covered period. Payroll costs can be included in the forgiveness calculation if they were paid during the covered period, or incurred during the covered period and paid on or before the next regular pay date. Non-payroll costs can be included if they were paid during the covered period, or incurred during the covered period and paid on or before the next regular billing date. More clarity is still needed in this area.
Alternative Payroll Covered Period
The application provides an alternative eight-week covered period that begins on the first day of the first pay period following receipt of a PPP loan. This alternative period is available only to borrowers on a biweekly or more frequent payroll schedule (note that this alternative applies only to payroll costs; non-payroll costs are still determined using the eight-week period following loan disbursement). Use of the alternative payroll covered period for payroll costs may simplify the calculation for clients looking to avoid pay periods that straddle the beginning and end of the covered period.
H.R. 7010 extended the covered period during which expenditures may qualify for forgiveness from 8 weeks from loan origination to 24 weeks, but ending on December 31, 2020, if earlier. Those borrowers who already qualify for full forgiveness may opt to remain with the original 8-week period.
Other H.R. 7010-Related Update
The deadline for rehiring employees to avoid forgiveness reductions is extended to December 31, 2020. Additionally, it allows employers who are unable to rehire their employees to find equivalent replacement employees or those who cannot return to normal business operations due to COVID-19–related restrictions to get an exception from forgiveness reductions related to the reduction in FTEs. It is expected that borrowers who wish to have an exception made for them will need to provide documentation regarding their inability to rehire employees or return to normal levels of business.
The rules require employers to report attempted, but unsuccessful, rehiring to state unemployment offices (employee refusals). If the employers do not report this information, they risk reduced forgiveness amounts via reduced FTEs. If employers report this information, the employees will likely encounter issues when filing for unemployment benefits.
If a borrower does not submit forgiveness applications within 10 months of the last day of the forgiveness period, loan payments will be required to begin.
Payment deferrals on the loans are extended from six months following loan origination until the date the SBA communicates its determination of forgiveness to the lender.
New loans will have a minimum maturity of five years, up from two years.
Borrowers may renegotiate existing loan terms if they wish to do so and the lender agrees.
Page 10 of the application provides a list of documents required to be submitted.
Is a Single Audit Required?
In late July 2020, the U.S. Department of Health and Human Services (HHS) provided a definitive answer regarding the audit requirements for nonfederal entities and for-profit entities expending funds under the new Provider Relief Fund (PRF) program. The PRF program (CFDA 93.498) is the second largest new federal program established by the Coronavirus Preparedness and Response Supplemental Appropriations Act. HHS has provided funding under this program to thousands of hospitals and other health care providers that are nonfederal entities (that is, states, local governments, and not-for-profits) as well as for-profit entities.
Recently, the SBA issued guidance stating that PPP loan funding specifically will not be subject to the single audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) for not-for-profit entities. However, the similar Economic Injury Disaster Loans (EIDLs) are direct from the SBA, rather than through independent lenders, and do qualify as federal assistance for that reason. Therefore, EIDLs are subject to OMB Uniform Guidance Single Audit Requirements for not-for-profit entities.
For nonfederal entities. HHS confirmed that the information at https://beta.sam.gov is correct and that these funds will be subject to single audit for nonfederal entities.
For-profit entities. HHS decided that for-profit entities that expend $750,000 or more of these funds during the entity's fiscal year will be subject to an audit as described in Section 75.216 of HHS's adoption of the Uniform Guidance. That section discusses two options for audit of commercial organizations: (1) a financial related audit of a particular award or multiple HHS awards in accordance with Government Auditing Standards or (2) a full single audit that meets the requirements contained in Subpart F of the Uniform Guidance. The Governmental Audit Quality Center (GAQC) Executive Committee is currently discussing best practices for performing these for-profit engagements and will consult with HHS, as well.
Please refer to the 2020 Compliance Supplement, expected to be issued Fall 2020, for proper procedures regarding single audits and these funds.
For an up-to-date, nonauthoritative summary of information on federal programs that have been established as a result of the COVID-19 pandemic, please use the AICPA GAQC’s summary located here.
What Will My Auditors Do to Test This?
Auditors of financial statements will likely look at PPP funds at varying degrees based on the amounts received (materiality) and any additional risk they present to the audit overall. Generally, if considered significant to the financial statements, auditors will be looking to audit the amounts received and ensure they were accounted for properly. Current guidance allows for entities to account for the PPP funds as debt and then record a gain on extinguishment when and if the borrower receives official notification of forgiveness from the
Nongovernmental entities could also potentially apply the guidance for recording the funds as government grants, if they believe they have met all the requirements for forgiveness. Auditors will want to see documentation from the lender that the loan has been forgiven, if the entity is recording a gain on extinguishment, or if the entity has recorded the funds as a government grant and forgiveness occurs prior to the date of the auditor’s report. Auditors would also likely perform more extensive audit procedures on the transaction if the entity opts to record it as a government grant to ensure that the funds are being used for qualifying purposes, and loan forgiveness has not occurred prior to the date of the auditor’s report (that is, similar to the application itself, auditors will most likely want to see backup for the flow of funds and evidence for each qualifying expense, such as payroll tax filings, third-party payroll reports, invoices for other qualifying expenses, and so on).
How Do I Track Expenses so I Don’t Double-Dip With Funding From HHS, the Federal Emergency Management Agency (FEMA), or Other Funding?
Although it may not be reasonable for all organizations, some have opted to set up a distinct bank account for PPP funds in order to keep them separate. At a minimum, for PPP funds, borrowers should establish some form of tracking mechanism for the flow of funds (that is, Excel or equivalent) that shows the PPP funds and each qualifying expense for which they were used. Additionally, the entity should maintain backup for each qualifying expense. For payroll, this could be in the form of third-party payroll processing reports, tax filings, internal payroll reports, and so on. For other qualifying expenses, backup in the form of invoices, receipts, bank statements, or check stubs, for example, are all useful to maintain. If an entity is receiving funds under multiple programs, it would be important to have a similar tracking mechanism in place for each funding source to ensure that each qualifying expense is being applied to the proper funding source and no double-dipping (that is, being paid from multiple sources for the same lost revenue or cost) has occurred.
Commercial Entity Taxability of Forgiveness Income and Expenses
How Is the PPP Loan Forgiveness Program Treated for Tax Purposes?
Section 1106 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act provides that the cancellation of indebtedness (forgiveness) will not be includible in gross income. The IRS has subsequently said, in Notice 2020-32, that in this situation Section 265 would apply, and expenses related to tax-exempt income would be nondeductible. This will be easy enough to apply when the expenses and the forgiveness happen in the same tax year. But what if the expenses happen in one tax year (calendar year 2020) and the forgiveness happens in a later tax year (calendar year 2021)? It could happen considering there is a 24-week forgiveness period in addition to the 60 days that the bank — and the 90 days that the SBA — may take to approve the forgiveness. Also, there could be potential delays with any review the SBA undertakes for loans over $2 million.
If this were to happen for the 2020 tax year, because there will be no cancellation of debt, there also would be no corresponding nondeductible expenses related to nontaxable income and, therefore, the expenses giving rise to the forgiveness would be deductible. Then, in the next tax year, when the forgiveness takes place, the taxpayer would not include the forgiveness in gross income. But what expenses would the taxpayer reduce for expenses attributable to the tax-exempt income? Likely, IRS guidance would have to resolve the treatment of timing differences. At a minimum, the guidance would call for the same “category” of expenses (Payroll, Rent, Interest, Utilities, and so on) to be reduced on the tax return by the amount of the forgiveness.
Depending on the taxpayer’s tax situation in 2020 vs. 2021, it might be preferable to plan the forgiveness timing in one of the tax years.
For Pass-Through Entities, the Qualified Business Income (QBI) Deduction Is Limited in Some Situations to 50% of Wages. Because the PPP Forgiveness Is Based on at Least 60% of Payroll Cost, and the Forgiveness Gives Rise to the Corresponding Reduction in Payroll Cost, Will the Disallowed Payroll Deduction Related to Forgiveness Affect the QBI Deduction for Those Companies Whose QBI Deduction Is Limited Due to the 50% of Wages?
When calculating the forgiveness amount for the PPP loan, the application reduces the wage expense by the salary reduction amount, then adds the other allowable expenses, then applies the FTE reduction to all expenses. The result is a fraction of the total of these expenses and is one of three options for forgiveness, the other two being the amount of the loan, and the last based on at least 60% of funds being used for payroll. The forgiveness is the lower of the three of amounts. As a result, it will be difficult to determine which expenses are to be considered nondeductible in some situations, especially when the allowable expenses exceed the loan forgiveness. Congress is now considering whether to legislatively change that outcome. This determination of which expenses are considered nondeductible could have an impact on multi-state and local allocations, which, many times, use payroll or rent expenses from the federal return in their base numbers.
CPA Services to a Client
My Client Is Requesting Assistance With the PPP Loan Forgiveness Process. How Might I Be Able to Assist?
The CPA might be asked to provide attestation or other services related to an entity’s documentation of expenses related to PPP forgiveness (Section 1106 of the CARES Act).
First, the CPA needs to determine the nature of service being requested (that is, no service, a consulting services engagement, or an agreed-upon procedures engagement).
Second, the CPA needs to also determine the current service relationship with the client (that is, whether the client is a client advisory services client, a tax advisory or preparation client, or an audit, attest, or review client).
Refer to this matrix, developed by the AICPA, to help the CPA determine what service might be provided given the ongoing or concurrent service relationship the CPA has with the entity as well as the relevant independence considerations under each service relationship. Note that this matrix applies to generally accepted auditing standards. Because organizations potentially will be required to have an audit performed under Governmental Auditing Standards, auditors should consider which independence standards apply to their situation.
Why Would I Apply for FEMA Funding?
In some situations, health care providers and hospitals may see an increase in incremental expenses as a result of the COVID-19 pandemic that are not covered by other government-funded programs, or the funding provided by these programs does not cover 100% of eligible expenses. These programs include the federal CARES Act distributions and state legislation programs. FEMA could be a funding source that helps recover additional incremental expenses to assist the health care provider in becoming whole on a monetary level.
Am I Eligible to Receive FEMA Funding?
If you are a state, local, or territorial government, you are eligible for FEMA funding assistance for the COVID-19 pandemic. In addition, certain private not-for-profit organizations (PNPs) are eligible for funding. This eligibility for PNPs requires documentation supporting the not-for-profit designation of the entity from a state or federal government organization.
How Does the FEMA Application Process Work?
FEMA is a federal agency that uses state emergency management agencies to facilitate program administration. In response to the COVID-19 pandemic, FEMA has developed a simplified public assistance application. The application and funding process for a potential recipient would be as follows:
Attend virtual applicant briefing
Log on and create an account at the Public Assistance Grants Portal
Submit a “Request for Public Assistance”
Submit a COVID-19 Streamlined Project application
FEMA and recipient review documents
Applicant signs grant agreement
Receive funding through recipient
FEMA does not cover 100% of costs; there is a cost-sharing component that will need to be paid for by other sources.
What Expenses and Costs Does FEMA Funding Cover for My Health Care Facility?
FEMA funding can cover a variety of expenses related to a health care facility’s COVID-19 response. This includes expenses incurred for the management and reduction of immediate threats to public health and safety; emergency medical care; medical sheltering; temporary facilities; the purchase and distribution of food, water, ice, medicine, and other consumable and expended supplies; security; public communications; and incurred additional labor costs due to increased staffing needs. For these expenses, documentation and support are critical for reimbursement purposes and are needed to show proof of purchase as well as proof that the expense was incurred due to the COVID-19 pandemic.
What Other Considerations Should I Be Aware Of?
It is important to recognize that FEMA will not duplicate funding assistance for expenses already paid from other sources (that is, HHS, state stimulus, insurance, and so on). Additionally, it is highly recommended that a robust system be in place to track all eligible expenses incurred because of the COVID-19 pandemic as well as ensure that the system tracks which program reimbursed the expenses, such as the CARES Act, FEMA assistance, and so on.
2020 Payroll Tax Deferral Under the CARES Act
What Is Payroll Tax Deferral?
For the remainder of 2020, the CARES Act generally allows employers of all sizes and types to defer the payment of the employer’s portion of Social Security taxes without interest or penalties. Fifty percent (50%) of the deferred amounts will be due by December 31, 2021, and the remainder will be due by December 31, 2022.
The deferral applies to deposits and payments that would otherwise be required to be made during the period beginning on March 27, 2020 and ending December 31, 2020.
Am I Required to Make an Election to Take Payroll Tax Deferral?
The IRS has stated that in no case will employers be required to make a special election to be able to defer deposits and payments of these employment taxes. They may simply defer the payments and report the deferred amounts on their Form 941, Employer's Quarterly Federal Tax Return (or equivalent).
Can I Reduce My Form 941 Deposits by the Amount of the Payroll Tax Deferral?
How Is the 2020 Payroll Tax Deferral Reported?
The deferral amount is to be reported on Form 941, which is currently being revised for the second calendar quarter of 2020. A draft version of the form is currently available on the IRS’s website, and the IRS has indicated that information will be provided in the near future to instruct employers how to reflect deferred deposits and payments otherwise due on or after March 27, 2020 for the first quarter of 2020 (January–March 2020).
How Does the 2020 Payroll Tax Deferral Interact With PPP Loans?
When the CARES Act was originally passed, payroll tax deferral was limited to only employers who had not had a PPP loan forgiven. The Paycheck Protection Program Flexibility Act of 2020, signed into law on June 4, 2020, removed this limitation. Payroll tax deferral is open to all taxpayers regardless of their PPP loan status.
How Does the 2020 Payroll Tax Deferral Interact With the Employer Retention Credits and Paid Leave Credits?
An employer is entitled to defer payment of the employer's share of Social Security tax prior to determining whether the employer is entitled to Families First Coronavirus Response Act (FFCRA) Paid Leave Credits or the Employee Retention Credit, and prior to determining the amount of employment tax deposits that it may retain or have refunded in advance in anticipation of these credits.
Example: Assume a company had $50,000 of employee retention credits in the second quarter of 2020. Assume that during the second quarter the company would have been required to make payroll deposits totaling $35,300: $20,000 in federal income tax withholding on the employees’ wages; $6,200 of employer’s share of Social Security; $1,450 of employer’s share of Medicare; $6,200 of the employees’ share of Social Security; and $1,450 of the employees’ share of Medicare.
The company may first defer payment of its $6,200 employer share of Social Security tax until 2021 and 2022. This reduces the company’s required payroll deposits from $35,300 to $29,100. Next, the company may reduce its required payroll deposits of $29,100 to zero by the anticipated retention credits of $50,000. Finally, the company may file a Form 7200, Advance Payment of Employer Credits Due to COVID-19, to request an expedited refund of the excess credit of $20,900. The employer will remit $3,100 (50% of the deferred employer share of Social Security taxes) on December 31, 2021, and the remaining $3,100 (50%) on December 31, 2022.
How Does the 2020 Payroll Tax Deferral Work for Self-Employment Taxes?
Self-employed individuals may defer the payment of 50% of the Social Security tax on net earnings from self-employment income for the same period. The 2020 Schedule SE should be updated to reflect this by next filing season.
In addition, for any taxable year that includes any part of the payroll tax deferral period, 50% of the Social Security tax imposed on net earnings from self-employment income during that payroll tax deferral period will not be used to calculate the installments of estimated tax due for purposes of computing penalties on late payments of estimated taxes.
When are Deferred Payroll Taxes Required to Be Remitted to the IRS?
Fifty percent (50%) of the deferred amounts will be due by December 31, 2021, and the remainder will be due by December 31, 2022.
What Other Considerations Should I Be Aware Of?
It should be noted that payroll tax deferral is not a credit but merely a tool to assist taxpayers with their cash flow. It is worth considering if the cash flows provided by the deferral are worth the additional recordkeeping and compliance or if deferring a significant amount of taxes will create its own cash flow issues in future years.
Additionally, it is recommended that taxpayers who use a payroll tax service have an internal system in place in order to track all deferred taxes. Although we believe that payroll services will track these amounts internally and communicate with its clients, there is a risk of error if a taxpayer changes payroll tax services during the deferral period.
Employee Retention Credit
What Is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable payroll tax credit available in 2020, equal to 50% of qualified wages (as defined the “What are qualified wages?” section that follows) for each employee of an eligible employer. The credit caps out at a maximum $5,000 credit per employee for the year. One key difference of the ERC from many other stimulus programs is that it is available to businesses regardless of size; at this time, the ERC is available to nongovernmental entities.
How Does the ERC Interact With Other Tax Credits and Stimulus Provisions?
If an employer receives a small business interruption loan under the PPP, authorized under the CARES Act, then the employer is not eligible for the ERC. There is an exception for employers that received a PPP loan but repaid it by May 18, 2020.
Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the FFCRA.
Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit under Section 51 of the IRC for the employee.
What Is an Eligible Employer?
The credit is available to two kinds of employers (including not-for-profits):
Those whose operations have been fully or partially suspended as the result of a government order related to COVID-19
Those whose businesses are experiencing “a significant decline in gross receipts”
A significant decline in gross receipts begins on the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019.
The significant decline in gross receipts ends on the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than 80% of its gross receipts for the same calendar quarter in 2019.
How Is the Credit Calculated?
The credit is calculated as 50% of the employer’s qualified wages. Only wages paid after March 12, 2020 and before January 1, 2021 can be qualified wages. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000.
Example 1: Eligible Employer pays $10,000 in qualified wages to Employee A in Q2 2020. The ERC available to the Eligible Employer for the qualified wages paid to Employee A is $5,000.
Example 2: Eligible Employer pays Employee B $8,000 in qualified wages in Q2 2020 and $8,000 in qualified wages in Q3 2020. The credit available to the Eligible Employer for the qualified wages paid to Employee B is equal to $4,000 in Q2 and $1,000 in Q3 due to the overall limit of $10,000 on qualified wages per employee for all calendar quarters.
What Are Qualified Wages?
The base definition of qualified wages will depend on how many employees an eligible employer has:
If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are those wages, including health care costs, paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether its employees are providing services.
If an employer averaged more than 100 full-time employees during 2019, qualified wages are those wages, including certain health care costs, paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can count wages only up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
How Do Businesses Claim the Credit?
Eligible employers will report their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns, usually Form 941. The ERC will then reduce the payroll taxes due dollar for dollar, with any excess being treated as an overpayment and refunded to the employer. Employers are permitted to access this credit in one of three ways:
The employer may pay its payroll taxes in full, wait until its Form 941 is filed, and await a refund from the IRS of the overpaid taxes. This is the slowest method of getting the credit.
The employer can fund qualified wages by accessing federal employment taxes, including withheld taxes that are required to be deposited with the IRS. In essence, the employer is permitted to reduce its Form 941 deposits to claim the credit with no penalties.
Example: An Eligible Employer paid $10,000 in qualified wages (including qualified health plan expenses) and, therefore, is entitled to a $5,000 credit and otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, for wage payments made during the same quarter as the $10,000 in qualified wages. The Eligible Employer has no paid sick or family leave credits under the FFCRA. The Eligible Employer may keep up to $5,000 of the $8,000 of taxes the Eligible Employer was going to deposit, and it will not owe a penalty for keeping the $5,000. The Eligible Employer is required to deposit only the remaining $3,000 on its required deposit date. The Eligible Employer will later account for the $5,000 it retained when it files Form 941 for the quarter.
Finally, if the employer had already made significant payroll tax deposits and the anticipated credit for the qualified wages exceeds the remaining federal employment tax deposits for that quarter, the Eligible Employer can file a Form 7200 to claim an advance refund for the full amount of the anticipated credit for which it did not have sufficient federal employment tax deposits.
Example: An Eligible Employer paid $20,000 in qualified wages and, therefore, is entitled to a credit of $10,000 and otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, on wage payments made during the same calendar quarter. The Eligible Employer has no paid sick or family leave credits under the FFCRA. The Eligible Employer can keep the entire $8,000 in taxes that the Eligible Employer was otherwise required to deposit without penalties as a portion of the credits it is otherwise entitled to claim on Form 941. The Eligible Employer may file a request for an advance credit for the remaining $2,000 by completing Form 7200.
I Need More Information About This Credit. Where Can I Find It?
The IRS has published a list of 94 frequently asked questions (FAQs) related to the ERC on its website, which cover many topics and details regarding qualified wages and calculations. These FAQs can be found at https://www.irs.gov/newsroom/faqs-employee retention-credit-under-the-cares-act.
What Other Considerations Should I Be Aware Of?
Employers with over 100 employees should carefully consider their employees’ duties and activities during the eligible period when determining whether the employees are currently providing services.
IRS FAQ #54 states that employers can use any reasonable method to determine the hours for which an employee is not providing services. The FAQ also notes that “[i]t is not reasonable for the employer to treat an employee's hours as having been reduced based on an assessment of the employee's productivity levels during the hours the employee is working.”
Currently, the process for determining which wages qualify for the credit is unclear, and calculations of this credit, as well as the risk under audit, will lean heavily on these decisions.
Downturn in the Economy and Job Market Related to COVID-19 and Its Impact on Accounts Receivable and Estimate of the Transaction Price
What Factors and Conditions Should We Consider?
Due to COVID-19, many communities have suffered an increase in unemployment and general decline in the economy, which could present conditions that adversely affect accounts receivable balances and estimates of transaction price.
Such conditions could pose collection risk, especially for self-pay amounts (for example, co-pays, coinsurance, and deductibles) that did not exist prior to COVID-19 conditions. Potential factors and conditions to consider include the following:
Has your patient or resident base been negatively affected by job losses, furloughs, wage deterioration, or all three?
Have any significant employers who provide health insurance for your patients or residents filed for bankruptcy or have their operations been negatively affected by COVID-19 conditions
Do COVID-19 conditions and the related government regulations to counter those conditions suggest a long economic recovery period for your patient or resident base
Other factors may also negatively affect the estimate of the transaction price.
Entities should assess local factors and conditions for possible indicators that may affect accounts receivable balances and transaction prices.
What Is the Consideration for Services Provided Prior to the Impacts of COVID-19
FASB ASC 606-10-32-9 indicates that the estimate of the transaction price not only include historical information but also current and forecasted information. For some entities, the negative economic and employment impacts of COVID-19 may necessitate an adjustment to the transaction price of unpaid balances for services provided prior to the impacts of COVID-19 as current and forecasted information differs significantly from the conditions at the time of service.
What Is the Consideration for Services Provided During COVID-19
In estimating the transaction price for services provided during COVID-19, entities may require adjustments (reassessments of variable consideration) to historical information when historical information differs from current and forecasted information (FASB ASC 606-10-32-14).
What Should I Do If Conditions (Prior to or During COVID-19) Materially Affect the Transaction Price?
FASB ASC 606-10-32 addresses variable consideration. Further, paragraph 11 of FASB ASC 606-10-32 states
[a]n entity shall include in the transaction price some or all of an amount of variable consideration estimated in accordance with paragraph 606-10-32-8 only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Entities should assess whether the estimate of the transaction price needs to be adjusted due to the economic and employment conditions from COVID-19, so there is not a significant revenue reversal after the end of the reporting period.
Should Subsequent Changes Be Recorded as Bad Debt or Reduction of Revenue?
Arrangements With Implicit Price Concessions
Entities should refer to paragraphs 7.6.30–.34 of the AICPA Audit and Accounting Guide Revenue Recognition (the Revenue Recognition guide) about how to account for subsequent changes to the transaction price when an entity provides implicit price concessions for the amount it doesn’t expect to collect (that is, the consideration is variable). Generally, subsequent changes would be recorded as a reduction of revenue; however, there may be situations in which the impact of the subsequent change is better represented as an impairment or bad debt.
Arrangements Without Implicit Price Concessions
Entities should refer to paragraphs 7.6.35–.36 of the Revenue Recognition guide about how to account for subsequent changes to the transaction price when an entity does NOT provide implicit price concessions. Typically, this includes entities that assess the patient or resident’s ability to pay prior to providing the good or service “and have chosen to accept the risk of default by the patient and the uncollectible amounts better represent impairment losses or bad debts.” In these cases, the subsequent change in the transaction price would be an impairment or bad debt.
Carrying Value of COVID-19 Supply Inventories
Many health care providers have purchased large quantities of personal protective equipment and supplies (PPE), sometimes for prices significantly in excess of what was considered normal before COVID-19.
Before COVID-19, some providers, by policy, did not inventory PPE supplies because their cost was insignificant, and they were acquired in much smaller quantities that were quickly consumed. Now, higher quantities are necessary to safely operate, and some states are
mandating minimum stocking levels. Furthermore, because of significant increases in PPE demand, prices have inflated and could remain inflated until availability of PPE rises to meet the demand.
What Should Health Care Providers Consider Related to Accounting for Their PPE Supplies?
If the cost of PPE on hand is now significant to a provider’s financial statements, it should be carried on the balance sheet at its cost, expensing it as consumed.
 In September 2020, the AICPA issued nonauthoritative technical questions and answers (TQAs) that provide information relating to the Coronavirus Aid, Relief, and Economic Security (CARES) Act provisions specific to nongovernmental health care entities, which include business entities and not-for-profit entities. The TQAs are expected to be codified in Q&A section 6400, Health Care Entities, of the AICPA publication in September 2020, and are available on the AICPA “Recently Issued Technical Questions and Answers” and “COVID:19 Accounting and Reporting” web pages.
 The AICPA issued Q&A section 3200.18, “Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program” (AICPA), in June 2020 to provide nonauthoritative guidance about how a nongovernmental entity should account for a forgivable loan received under the Small Business Administration Paycheck Protection Program (PPP). This question and answer applies to not-for-profit entities and public and private business entities and discusses acceptable ways to account for such loans. It also reflects the Office of the Chief Accountant of the SEC Staff’s views on accounting by SEC registrants.
 At the time this document was published, Congress was considering bi-partisan legislation that would render deductible the expenses associated with PPP loan forgiveness. It is expected that such legislation will be considered by the first week of August 2020.
 See footnote 4.