Health Care: COVID-19 Accounting and Financial Reporting Considerations

Forgivable loans and grants under the CARES Act are either conditional or unconditional. The first step in understanding how to record funds is to determine if your relief funds are considered conditional.

Conditional loans and grants

• Under ASC 958-605, a contribution or grant received by a not-for-profit organization is considered conditional if it contains a barrier that must be overcome and a right of return. If such conditions exist, revenue is deferred until they have been substantially met.
• If the grant contains restrictions on its use, the grant should be included in ‘net assets with donor restrictions’ until those restrictions are satisfied, at which time the grant can be reclassified out of net assets with donor restrictions and recognized above the performance indicator as net assets released from restrictions for operations

Both situations result in revenue not being recognized until either the conditions or restrictions are satisfied.

Unconditional loans and grants

In the absence of conditions or restrictions (or once conditions are met), grants should be recognized above the performance indicator if they are received for operating costs or as an increase in net assets without donor restrictions if they are received for the purchase of long-lived assets.

There is no distinction within Financial Accounting Standards Board guidance between the manner in which for-profit entities are supposed to account for loans and grants that are conditional and the manner in which such entities are supposed to account for loans and grants that are unconditional. In the absence of guidance, for-profit entities might look to not-for-profit guidance as discussed below.

Payroll Protection Program loans

PPP loan relief funds may be forgiven if certain criteria are met and upon approval of the lender. As such, PPP loans are subject to the guidance under ASC 958-605 for conditional contributions.

Under ASC 958-605 contributions should be recognized as revenues in the period received and as assets are received or liabilities are decreased. Because PPP loans include barriers regarding the use of a minimum portion of funds for payroll and maintenance of full-time equivalents, such loans will remain outstanding until the lender approves the application for forgiveness; at that time, the loan will be reduced and will be recognized as a contribution above the performance indicator.

Organizations that follow standards issued by the Governmental Accounting Standards Board (GASB) will have a similar approach, recognizing the loan forgiveness under grants and contributions upon approval.

For-profit health care organizations should also record the loan forgiveness amount as a separate debt extinguishment line item in the financial statement. Accounting standards do not prescribe if extinguished debt should be reported as operating or non-operating. However, in the absence of differing guidance, presenting the forgiveness as a grant – consistent with how it would be presented for a not-for profit entity – may be appropriate.

CARES Act Public Health and Social Services Emergency Fund

The CARES Act established the Public Health and Social Services Emergency Fund to reimburse eligible health care providers for health care-related expenses or lost revenues attributable to COVID-19.

Sums received from the Emergency Fund must be used for building or construction of temporary structures, leasing of properties, medical supplies and equipment (including personal protective equipment and testing supplies), increased workforce and trainings, emergency operation centers, retrofitting facilities, and surge capacity.

Because restrictions exist on the use of the amounts received not-for-profits, should record proceeds from the Emergency Fund as net assets with donor restrictions until expenditures have been made satisfying the restricted purpose. As grant proceeds are expended, they can be released from restrictions for operations, unless the health care entity has chosen to reflect those proceeds as non-operating revenue.

For organizations that follow GASB standards, this type of grant is considered a voluntary nonexchange transaction. The grant is restricted for use on qualifying expenditures. As a result, the proceeds will be recognized under grants and contributions when they are received, but should be reflected as restricted expendable net position until expenditures have been made for qualifying purposes. At that time, the proceeds will be reclassified to unrestricted net position.

Specific guidance is not currently available on accounting for grants received by for-profit entities. However, such entities have the same considerations as not-for-profit entities. A liability would generally be reflected until qualifying expenditures are made, at which time the liability can be reduced and recognized in the income statement

Medicare advance payments

Health care providers may receive advance payments from Medicare in anticipation of future services. The amount received by the provider is based on up to three months of Medicare payments, with repayment beginning 120 days after issuance through automatic reduction of current claims. The revenue related to the advance payments has not yet been earned, so it should be recorded as a contract liability.

As an organization bills Medicare for patient services following the receipt of advance payments, the organization will receive remittance advices for services that have reduced or zero installment amounts as the advance payment is recouped. When remittance advices are received with a recoupment or zero payment amount, the related patient accounts receivable and contract liability will be reduced.

The same accounting is follow for Medicare advance payments by an organization following GASB standards. However, any unexpended amounts are classified as unearned revenue in liabilities and reduced following the same process described above.

How CLA can help

In addition to the above considerations for health care providers, see broad accounting considerations in our recent article, Stimulus Relief Dollars: Accounting and Financial Reporting Considerations.

CLA is here to help you navigate any accounting and audit issues related to stimulus funds. For more information, please contact us.

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