Mark Koscinski Uncategorized

PPP Loan Forgiveness–Part II

The  Small Business Administration(SBA) has just published its PPP loan forgiveness process. Borrowers are required to submit a package to their lenders documenting use of the funds was done in accordance with the terms of the loans.  The lender will have 60 days to make a good faith determination this was so.  Any deficiencies in the application will need to be corrected before the package is submitted to the SBA. Assuming this is done properly, the SBA will then have 90 days to make a determination of forgiveness.  If rejected, there is an appeals process. The SBA has indicated it will review all loans in excess of $2 million for compliance and possibly for eligibility as well.  

In a previous blog I was critical of the Financial Accounting Standards Board requiring organizations to wait until the SBA formally grants forgiveness of the PPP loans before they could be removed from the borrowers’ balance sheet. Let’s look at this situation. There is a high probability the loan packages will be rejected by either the bank or the lender along the way. Corrections will be made, adding more time to the process. (You have all dealt with banks and regulators before, right?)  Optimistically, this could take a minimum of six months.   The borrower could have satisfied all of the requirements for forgiveness except not  hand-in complete paperwork. This simple action, subject to the whims of bankers and regulators, could determine the date the loan is forgiven and not the economic event of compliance. Since the SBA will not begin accepting applications until August 10, PPP liabilities will be on the balance sheet for six months minimum, clouding  readers’ analysis of the financial statements. Does this make sense to anyone?

Let’s look at some of the practical implications of this. I had complained  NFP organizations with a fiscal year-end of June 30 had no chance of having the debt removed from their balance sheet.  Now, NFP organizations with a fiscal year-end of September 30 will also be carrying the debt on their year-end balance sheets. This will probably be the case for December 31 year end organizations as well. 

In the meantime, bankers will need to give very clear instructions about what they will accept as proof of compliance to speed the process along.  Similarly, NFP management should not make the lenders or the SBA work hard to recommend or grant forgiveness.  Take the time to put together an easy to follow package with sufficient detail. Make the package easy to review.  In short, don’t scrimp on the upfront preparation.  It will only slow the process down.  You want this loan off your balance sheet as fast as you can. 

Mark Koscinski Uncategorized

Some Welcome Relief

As if the rugged terrain of managing an NFP entity wasn’t difficult enough, then came along the Coronavirus.  This created turmoil in the NFP world  and in the world in general) and will certainly result in some organizations suffering deep budget cuts or even failing.  The State of New Jersey for instance has announced a new budget deficit as a result of the pandemic that could  reduce its spending across the board.  The Financial Accounting Standards Board, the private body that sets accounting standards for NFP entities, has proposed some welcome relief for NFPs. It is  postponing the implementation of the new lease accounting standard  for private businesses and NFPs until fiscal years beginning after December 15, 2021. In effect, this gives these entities a year’s grace period for implementation. 

Implementing this  accounting  standard would be a burden on many organizations as accounting staffs will be pressured to even maintain and close the books for  these organizations.  Many accountants could not even access source data  for extended periods of time as offices were shuttered across the country. Adding another burden of adopting a new accounting standard  let alone one as complex as this one  would be beyond many organizations’ capabilities.  In the meantime, many NFPs are either granting rent concessions for facilities they lease out or receiving rent concessions for properties they rent.  The NFP financial statements should clearly disclose any material concessions granted and received, as well as the accounting treatment used. 

On another front, the President signed a bipartisan bill expanding uses of the Payroll Protection Plan (PPP) loans.  Previously, 75% of the funding had to be used for payroll purposes in order to have the loan balance forgiven. The new law lowers that threshold  to 60%. This flexibility will also be a welcome relief to many NFPs struggling with utility bills and other operating expenses.  The bill also lengthened the amount of time the funding could be used.  When you couple these two developments with the surprising May 2020 jobs numbers, perhaps there is some more hope on the horizon!  Stay tuned.

Mark Koscinski Uncategorized

Contract Review

As the COVID-19 pandemic continues to wreak havoc with the United States economy, some organizations are beginning to dig in for the long haul. While everyone wishes we could get back to business as soon as possible (and there are some indications this is what will occur), it may be many months before that happens.  Increased expense control is becoming the watchword for many NFP organizations as donations and other sources of revenue dwindle.  In some cases, stringent cost controls will be a matter of survival. Sadly, many employees may be furloughed in upcoming week because of the fallout from current events. 

One area all NFPs should investigate thoroughly is the possibility of business interruption clauses in their contracts.  Lease contracts often provide rent abatement for “Acts of God” preventing the normal operation of the organization or if the landlord closes down the building. Yes, there is a good reason for the landlord to close a building in an epidemic, but it is good for any NFP management to understand what its options are in the circumstances.  Perhaps a negotiated settlement fair to all parties can be reached. Needless to say, rent is often a major expense for any organization and an abatement for the period of the national emergency could be a lifesaver for an NFP. On the other side of the coin, many NFP organizations may also be landlords.  Knowing if your lease contains an “out” clause for tenants could be a nasty surprise, but it is better for management to find out about it now rather than later.

NFP management should also take the time to review other contracts where services are contracted or services are being provided.  These contracts may contain force majeure clauses.  Management will also want to know if there are liquidated damages clauses in these contracts.  A liquidated damages clause will spell out what one party may have to pay the other in case of nonperformance under the terms of the agreement.  Contracts with major vendors and customers should be reviewed because of the material consequences such clauses could have on its future operations.

Finally, NFPs should consider opening up a general ledger account where losses from this crisis can be accumulated.  No one knows how long the current state of affairs will continue or what the federal government will do about losses sustained by NFPs because of it.  If the federal government does provide additional relief, you can bet there will be reporting requirements. It is better to be ahead of the curve and have the information neatly stored in one place and readily accessible. 

More to come as the days go by!