A study in diverse practice, or: we got our $40,000, so what do we now?

Here are three contrasting recent disclosures:

  • On May 1, 2020, the Company received a loan of $40,000 pursuant to the Canada Emergency Business Account  (“CEBA”). The CEBA  provides  zero-interest,  partially  forgivable  loans  of up  to  $40,000  to small businesses that have experienced diminished revenues due to COVID-19 but face ongoing non-deferrable costs, such as rent, utilities, insurance, taxes and employment costs. If the balance of the loan is repaid on  or  before  December  31,  2022,  25%  of  the  loan  will  be  forgiven. The  loan  bears  no  interest  until December 31, 2022, at which point, if unpaid, it will convert to a three-year term loan bearing interest at 5% per annum. The loan was initially measured at its fair value of $22,061 and is subsequently measured at amortized cost, using an effective interest rate of 23%.  During the year ended June 30, 2020, $824 of interest  expense  related  to  the  CEBA  loan  was  recognized  and included  in  accretion  expense  in  the consolidated statements of operations and comprehensive loss. The Company received a benefit of $17,939 due to the below-market interest rate on the CEBA loan. This benefit was  initially recognized as a deferred gain and was recognized as income  as the Company used the proceeds from the loan to fund its operational expenditures.
  • Government assistance from the Canada Emergency Business Account (“CEBA”) loans under federal COVID-19 response programs are recorded as a liability until there is reasonable assurance that the forgivable portion of the assistance will not be repayable.
  • The Canada Emergency Business Account (“CEBA”) Loan is an interest free loan to assist with cash flow needs and is provided by the Government of Canada.  If this loan is repaid in full by December 31, 2022, 25% of the amount loaned under CEBA is forgiven.  The CEBA loan is non-interest bearing and is unsecured.  As management intends to repay this loan before December 31, 2022 it has recorded the 25% forgiveness as government assistance.

In the first case, the balance sheet recognized the post-amortization amount of $22,885 as a non-current liability. In the second case, the entire $40,000 received was shown as such. In the third case, the non-current liability was $30,000, with $10,000 reported as other income. Based on my quick survey, plenty of other precedents existed for each treatment – it appeared to me that the second treatment was the most widely adopted, although more investigation might change that conclusion.

This is a rather unusual case, in that many companies received the CEBA loan and assessed it as being sufficiently material that the accounting treatment should be entirely visible to a reader; however, in the absence of any guidance from a common source such as CPA Canada’s IFRS Discussion Group, they had to work it out for themselves, leading to the range of treatments evidenced above. The first approach embodies even more possible underlying variation, depending on the amortization rate applied, and the approach to recognizing the benefit in income. So as such it allows us a rare window on how different accountants, asked to analyze the accounting for a fairly straightforward item (at least in the sense that it can be explained in a matter of seconds), arrived at different conclusions. And by the same token, your reaction to this probably speaks to your degree of tolerance for the inconsistent practice that inevitably results on occasion from principle-based accounting. If you see the examples above as pointing to something that, if the numbers were larger, might constitute a scandal, then I guess you’re standing at one end of the spectrum; if you see it more as something of philosophical or conceptual interest, then I expect you’re at the other. (Of course, you may not see the matter as being of any interest at all, which would also be fine, and in which case I assume you’ve checked out of this article before this point).

You might think this is a grimly cautionary tale, pointing to the likely extent of inconsistency in all the matters that aren’t reported as transparently as this one. It may also test your tolerance for the “anything goes as long as you disclose” mode of thought. It’s evident in all three cases above that the treatment is made entirely clear to a reader, and if he or she disagrees with it on any basis, the information is all there to make the resulting mental adjustment, so – you might say – does it really matter? Further, if a reader thinks the treatment applied by a particular company is flawed, then perhaps it provides an unusually crisp and relevant warning sign regarding the company’s limited analytical capacities. On the other hand, you might think that evidently flawed accounting treatments are like the proverbial broken windows that should be immediately pounced upon for the sake of preventing greater societal breakdown. If we assume that for some entities the item was only borderline material, you might even think it would have been preferable to avoid so specifically highlighting it, and subsume it within other account balances…

Which approach would I endorse, you ask? Against such a stimulating backdrop, it would spoil the fun to say…

The opinions expressed are solely those of the author

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