As a result of the current economic situation, entities that own or lease hotels are eligible to apply for and receive a loan under a government assistance program. An example of this is the Paycheck Protection Program (PPP) in the United States.
This program requires the hotel to meet certain eligibility requirements in order to apply, and the funds are restricted for specific uses such as labor costs, utilities, rent and debt payments. Under certain circumstances, all or a portion of the loan may be forgiven.
To help guide USALI users, the USALI Global Finance Committee came together to collaborate and issue their recommendations on the appropriate accounting treatment for the receipt of the loan proceeds and any forgiveness thereafter.
Note: This guidance relates to accounting treatment for hotels that receive loans under any government-sponsored program that has been established to provide assistance/relief to hotels which have been impacted by COVID-19 (for example, the PPP established by the CARES Act in the U.S.). Such guidance is only applicable to the borrower, which is frequently the owner, and not the hotel.
However, the committee notes that a significant amount of judgment and interpretation is required in the application of the principles and examples below, and the outcome is dependent on all of the factors in a particular circumstance when considered together, not driven by one individual factor versus another.
Covid-19 Puzzlers for USALI Recording: Accounting Treatment for Hotels that Receive a Government Assistance Loan
The threshold question to ask: At the inception of the loan, will the borrower be able to comply with the loan conditions — and will some or all of the loan be forgiven?
The borrower should account for these funds as either a loan or a grant depending on the answer to these questions.
If you believe you will meet the conditions of forgiveness at the inception of the loan and that some or all of the loan will be forgiven, treat it as a grant.
The portion of funds received that meet this criteria should be accounted for within profit and loss as a reduction of the borrower’s specific expenses that were provided for by the loan and subsequently forgiven. These expenses may include contra salaries, benefits, utilities, rent, debt service and more.
The loan forgiveness should be recognized on a systematic basis in line with its recognition of the expenses that the loan is intended to compensate. Any portion of the loan which is probably not going to be forgiven should be accounted for as a loan (see guidance below).
Given that the guidance provided by the government as to eligibility of the loan and requirements for loan forgiveness is often changing and subject to evolving interpretations, we believe that it will be rare for an entity to conclude that conditions are probable at loan inception.
If you do NOT believe the conditions will be met and that some or all of the loan will be forgiven, you should treat it as a loan. Upon receipt of loan proceeds, the borrower should account for the loan as required by the generally accepted accounting principles (GAAP), in the same manner as it would for any other loan.
The loan should not be subsequently derecognized until the recipient has been legally released from the loan, either partially or in full. At such time, the loan balance should be accounted for pursuant to GAAP — with the portion of the loan amount forgiven recorded as a credit (or increase) to non-operating income within the Non-Operating Income and Expenses section of the operating statement.
Since the forgiveness is not accounted for until the borrower has been legally released, the original expense for which the loan proceeds were intended to compensate and the subsequent forgiveness will likely be recorded in different accounting periods.
Please note: The treatment as a loan is permitted in all instances — even if the recipient can conclude that it probably will meet the conditions of forgiveness.
This is the final part of a three-part blog series on HFTP Connect that details new USALI recording guidance for puzzling scenarios unique to the Covid-19 pandemic. The committee also presented recording guidance on the treatment of revenue/expenses for hotel use by a health organization or government agency and government-sponsored wage subsidies/grants.