The Restaurant Revitalization Fund (RRF) was created by the American Rescue Plan Act of 2021. $28.6 billion in funding was allocated for grants to eligible entities. RRF grants will be administered by the Small Business Administration (SBA).
The grant is based on the decline in gross receipts comparing 2019 and 2020 for businesses which were open in 2019, with a maximum grant of $5 million per physical location and $10 million per entity. There are alternative calculation methods for businesses which were not open for years 2019 and 2020. Be sure to read the discussion on eligible entities, below.
This article is general in nature and is not intended to give advice to you or your business. You should always consult your own financial and legal advisors. If I can be of further assistance, please contact me.
How to Apply:
SBA has announced that it will begin accepting applications on Monday, May 3, 2021, at 12:00 p.m. EDT. There are three ways to apply:
SBA has opened its online portal to roll-out the RRF program. Advance registration is required before filing an application.
Restaurants who currently use an SBA POS partner may apply through their POS partner. This currently includes Toast, Square, Aloha and Clover, but others may be added.
By telephone at 844-279-8898
This article is a summary of the RRF. For complete information, see the SBA Program Guide. As of the date of this article, the most recent Program Guide was published April 28, 2021.
How to Calculate Grant
There are three calculation methods, based on when the business began operations. Remember, in each case a grant is limited to a maximum of $5 million per physical location and $10 million per entity.
Calculation 1:
Use Calculation 1 if the business began operations on or before January 1, 2019.
Subtract 2020 gross receipts from 2019 gross receipts. Then subtract any PPP loans received in either 2020 or 2021. For example, if a business had 2019 gross revenues of $2 million, and 2020 revenues of $1 million and had received a $250,000 PPP loan, they could apply for a RRF grant of ($2 million – $1 million – $250,000) = $750,000.
Calculation 2:
Use Calculation 2 if the business began operation after January 1, 2019. Restaurants who began operations partially through 2019 may elect to use either Calculation 2 or Calculation 3, however if they began operating after December 31, 2019 they must use Calculation 3. Calculation 3 may be advantageous if a business had low revenues in 2019, and significant expenses in 2020.
Annualize 2019 average monthly gross receipts, then subtract 2020 gross receipts and any PPP loans similar to Calculation 1. For example, assume a business opened on July 1, 2019 and had $1.2 million gross receipts in 2019, and $1 million in 2020 and had received a $250,000 PPP loan. They could apply for a RRF grant of $1,150,000.
Example of Calculation 2
Calculation 3:
Use Calculation 3 if the business began operation between January 1, 2020 and March 10, 2021. Applicants who have not yet opened but have incurred eligible expenses would also use Calculation 3.
For example, assume a restaurant began operations on March 1, 2021, and had gross receipts of $50,000 between opening and March 11, 2021. The restaurant incurred eligible expenses of $800,000 during the period February 15, 2020 and March 11, 2021 and received a first-draw PPP loan of $10,000. In this example, they would be eligible for a RRF grant of $740,000:
Example of Calculation 3
Eligible Entities
The overall rule is that RRF grants are available for places of business in which the public or patrons assemble for the primary purpose of being served food or drink. To satisfy this requirement, at least 33% of an entitie’s gross revenues must be from on-site sales to the public. I’ll refer to this requirement as the “on-site sales test”. To be eligible, the business must not be permanently closed, however it may be temporarily closed. A business could even qualify if it will be opening soon and had expenses incurred as of March 11, 2021.
The on-site sales test is performed using 2019 data, however for businesses who opened in 2020 or have not yet opened the applicant’s original business model should have contemplated at least 33% of gross receipts in on-site sales to the public.
The SBA Program Guide includes a list of eligible businesses. The following are presumed to meet the on-site sales test:
Restaurants
Food stands, food trucks, food carts
Caterers
Bars, saloons, lounges, taverns
Licensed facilities or premises of a beverage alcohol producer where the public may taste, sample, or purchase products
Other similar places of business in which the public or patrons assemble for the primary purpose of being served food or drink
Snack and nonalcoholic beverage bars.
The following types of businesses will be required to submit documentation which their application to support meeting the on-site sales test:
Bakeries
Brewpubs, tasting rooms, taprooms
Breweries and microbreweries
Wineries and distilleries
Inns
Other Definitions
Ineligible Entities:
State or local government-operated business
Non-profits
Publicly-traded business
As of March 13, 2020, owns or operates (together with any affiliated business) more than 20 locations
Received or have a pending application for a grant under the Shuttered Venue Operators Grant program
Permanently closed
On-site sales:
On-site sales include sales of food and/or beverages that were:
consumed on the applicant’s premise
were purchased at the applicant’s premise to-go
were purchased online and picked up from the applicant’s premise or were delivered directly to a consumer for use.
On-site sales do not include wholesale sales.
Gross Receipts:
Gross receipts includes all revenue received or accrued, calculating using the entity’s accounting method (accrual or cash). It includes sales of products or services, interest, dividends, rents, royalties, fees or commissions. Gross receipts is reduced by returns and allowances.
Gross receipts does not include net capital gains and losses, PPP loans (first-draw or second-draw), SBA Section 1112 payments, EIDL Loans, EIDL Advances, Targeted EIDL Advances, Randolph-Sheppard Act Financial Relief and Restoration Payments, or state and local small business grants.
Eligible Expenses
Grant funds can be used for:
Payroll costs
mortgage payments (principal and interest)
Rent payments
Utilities
Maintenance expenses
Supplies
Food and beverage expenses
Covered supplier costs
Operational expenses
Paid sick leave
Other essential expenses
Covered Period
The covered period is the period in which the grant must be used to pay for eligible expenses. The covered period for this grant program is February 15, 2020 through March 11, 2023. If funds aren’t used on eligible expenses before the end of the covered period, or if the business permanently ceases operations, the funds not used for eligible expenses are required to be returned.
The Shuttered Venue Operators Grant program, or SVOG, is scheduled to begin accepting applications on April 8, 2021. $16 billion in funding is available. Grants can equal 45% of gross earned revenue, up to a maximum of $10 million. I believe the available funding will go quickly, and encourage you to be ready to apply if you are eligible.
The Small Business Administration, or SBA, will administer the program. Recently, SBA released a draft application form, and is developing its SVOG portal.
Briefly, if you believe your organization might be eligible, you can do the following things to prepare to apply:
If you don’t have a DUNS number, apply immediately.
Register with the federal System for Award Management (SAM) system. SAM registration can take up to two weeks once submitted.
Review the draft application form
Review the preliminary application checklist, and assemble the required documentation. This list is extensive and could take some time to complete.
The SVOG program details are discussed more completely in a recent post, so I won’t repeat them here. It is probably not too late to prepare to apply, but I would not wait much longer. If you need assistance, please either discuss with your CPA or contact me and I’ll be happy to help.
The Consolidated Appropriations Act, 2021 established the Shuttered Venue Operators (SVO) Grant Program. The SVO grant program was further revised by the American Rescue Plan Act, which was signed into law on March 11, 2021. This article will update my earlier discussion of the SVO grant program and reflects subsequent announcements made by SBA. The shuttered venue operators grant program authorizes up to $15 billion in grants to eligible entities. The Small Business Administration, or SBA will administer the SVO grant program.
Eligible applicants may qualify for SVO grants equal to 45% of their gross earned revenue, with a maximum single grant of $10 million. $2 billion is reserved for eligible applicants with up to 50 full-time employees.
Recent Changes
The latest SBA guidance announced several important changes from previous guidance. I’ll summarize them here, and discuss them in more detail below:
On March 21, 2021, SBA launched its SVO Grant Portal. If you are interested in SVO grants, I encourage you to bookmark that page and check it often. There is a link to sign-up to be informed when the application process opens.
Also, on March 21 SBA announced that it will begin accepting applications for SVO grants on April 8, 2021.
Previously, an entity was prohibited from receiving both a SVO grant and a paycheck protection program (PPP) loan. This is no longer the case:
If an entity applied and was approved for a PPP loan prior to December 27, 2020, it is eligible to apply for an SVO grant.
If an entity has applied for a first draw or second draw PPP loan on or after December 27, 2020, it is now eligible to also apply for an SVO grant. If the SVO grant is approved, however, it will be reduced by the amount of the PPP loan.
If an entity receives an SVO grant, it is not eligible to subsequently apply for a PPP loan.
Guidance
The SBA is in the process of setting up the grant program and will begin accepting applications on April 8, 2021. The most recent guidance from SBA, released in the form of frequently asked questions, was issued on March 12, 2021.
As noted above, if you are interested in the SVO grant program, you should visit the SBA’s portal.
SBA also released a Preliminary Application Checklist on March 5, 2021. SBA said that the SVO grant application process is still under development and the list is subject to further refinement.
On February 18, 2021, SBA released a video webinar explaining how to register in the System for Award Management (SAM). As explained below, registration in SAM is required to apply for a SVO grant.
This article is general in nature, and is not intended to provide specific advice to you or your business. You should consult with your financial and legal advisors. However, I’m happy to answer questions. Please contact me if I can be of assistance.
What you should do now
As the SBA works on building the application platform, there are some things you can do to prepare to apply:
Register for a Dun & Bradstreet number (DUNS). A DUNS number is necessary to apply. If you do not have a DUNS number, you can apply by clicking the link. The site indicates a number can be issued within one business day.
All applicants must register in the System for Award Management (SAM). The SBA encourages you to obtain your DUNS number as soon as possible and register in SAM. You cannot use an individual Taxpayer identification number, an Employer identification number or other means of identification. The SAM registration process may take up to two weeks once submitted.
Review and gather the required documentation to support your (eventual) application. I’ve summarized the requirements below, but you should also refer to the official SBA guidance if you have any questions.
Stay up to date by frequently visiting www.sba.gov/svogrant or this website as guidance is updated and the application process is opened.
An otherwise eligible entity would become ineligible for SVO grants under the following types of circumstances:
It does not have a place of business located in the United States, does not operate primarily within the U.S., and does not make a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.
The firm was not in operation as of February 29, 2020
The company received a PPP loan (first draw or second draw) on or after December 27, 2020
It is a publicly traded corporation, or is majority owned and controlled by a publicly traded corporation
It presents live performances or sells products or services of a prurient sexual nature
More than 10% of its 2019 gross revenue came from the federal government (not counting disaster assistance)
It owns or operates venues, theaters, museums or talent agencies in more than one country
It owns or operates venues, theaters, museums or talent agencies in more then ten states AND it had more than 500 employees as of February 29, 2020
Allowable Use of Funds
Funds may be used for specific expenses, which include:
Payroll costs
Rent payments
Utility payments
Scheduled mortgage payments (not including prepayment of principal)
Scheduled debt payments on any indebtedness incurred in the ordinary course of business prior to February 15, 2020. Similar to mortgage payments, prepayment of principal is not an allowable use of funds.
Worker protection expenditures
Payments to independent contractors (not to exceed $100,000 in annual compensation per contractor)
Other ordinary and necessary business expenses, including maintenance costs
Administrative costs (including fees and licensing)
State and local taxes and fees
Operating leases in effect as of February 15, 2020
Insurance payments
Advertising, production transportation and capital expenditures related to producing a theatrical or live performing arts production. (May not be the primary use of funds)
Funds may not be used to:
Buy real estate
Make payments on loans that originated after February 15, 2020
Investments or loans
Contributions or other payments to, or on behalf of, political parties, political committees or candidates for election
Any other use prohibited by the SBA Administrator
Required Documentation
All Applicants
Background documents
Written statement of need and assurance
Required by statute and must include:
A good faith certification that the uncertainty of current economic conditions makes the grant necessary to support the ongoing operations of the eligible person or entity.
If the entity is currently in operation, must state that the entity will remain in operation after receipt of the funds.
If the entity is shuttered, the statement shall include the intent to reopen with an estimated reopening date.
All statements shall include an assurance that the entity was fully operational on February 29, 2020, and that the funds will only be used for the allowable purposes.
.Corporate Documents
May include Articles of Incorporation, Certificate of Existence, Certificate of Organization, State LLC Agreement, Certificate of Formulation or Articles of Information.
Government issued photo ID – front and back
A copy of a photo ID. This could be a state driver’s license, passport book, passport card, US military or military dependent ID, US permanent resident card, etc.
Employee list with job titles and employee status (full or part-time)
A complete listing of all who work for the entity at the time of application. This is separate from the official payroll record. Each employee must include:
Complete name
Description of employee*:
Status:
full-time
part-time
temporary
employee agency
leasing concern
union agreement
co-employed pursuant to a professional employer organization agreement
salaried
included in payroll
not included in payroll
owner, officer or shared with affiliate.
Number of hours employee works per month
Tax exempt status letter
only required for non-profit entities
also known as an IRS determination letter.
The description of employee requirement can be tricky, some individuals may require multiple designations in the description. Some examples given by SBA: “Jane Smith – owner, salaried, included in payroll” and “Joe Smith, owner, not included in payroll, shared with affiliate.”
Financial documents
2019 Tax Return
If in operation for any portion of 2019, provide a copy of the entity’s 2019 tax return.
2020 Tax Return, if filed
If not already filed, provide to SBA when filed with the IRS.
Quarterly Income Statements for 2019 and 2020
Must demonstrate all sources of revenue and expenditures.
If not in business for all of 2019, include statements for the quarters it was in operation.
Copy of most recently Audited Financial Statement (2019) or Single Audit (if applicable) or link to website where the report can be located
Unofficial guidance is that this is required for grants of $750,000 or more.
If the period audited is older than six months, include interim Income Statement and Balance Sheet (certified by an officer of the organization).
Indirect cost rate agreement with cognizant agency (if applicable)
Attach current indirect cost rate agreement, if one is in place.
May negotiate a proposed rate to be negotiated.
If negotiated cost rate agreement was never in place, a 10% de minimus rate.
Payroll statements covering the pay period including February 29, 2020.
Certifies the entity will comply with all applicable requirements of the federal laws, executive orders, regulations and policies governing the grant program.
Certification regarding lobbying and disclosure of lobbying activities.
Applicant-Specific Documents
Live venue operator or promoter, theatrical producer, or live performance arts organization operator
Floor plan (and plan of grounds if outdoor space is used for the performance venue)
Provide the floor plan used for insurance purposes or local fire inspections. Floor Plan (and plan of grounds if outdoor space is used for the performance venue) should demonstrate the location of the defined performance space.
Documents to show that the venue has audio mixing equipment, a public address system, and a lighting rig.
This can include receipts for purchase or installation, or insurance documents covering the items.
Marketing materials
Include copies of print or electronic advertising, paid receipts for advertising, social media pages, etc. that list event or motion picture titles, show times and dates, and ticket price or entry requirement.
Box office / ticketing report
Report listing event title, show time, ticket price and number of tickets sold.
Provide the report for all February 2020 performances.
If the venue was in operation but had no performances in February 2020, select one month between January 2019 and January 2020.
Motion Picture Theatre Operator
Floor Plan
Provide the floor plan used for insurance purposes or local fire inspections. Floor Plan (and plan of grounds if outdoor space is used for the performance venue) should demonstrate the location of the defined performance space. The floor plan should also identify the projection booth.
Marketing Materials
Include copies of print or electronic advertising, paid receipts for advertising, social media pages, etc. that list event or motion picture titles, show times and dates, and ticket price or entry requirement.
Box office / ticketing report
Report listing event title, show time, ticket price and number of tickets sold.
Provide the report for all February 2020 performances.
If the venue was in operation but had no performances in February 2020, select one month between January 2019 and January 2020.
Museum
Floor Plan
Provide the floor plan used for insurance purposes or local fire inspections. Floor Plan (and plan of grounds if outdoor space is used for the performance venue) should demonstrate the location of the defined performance space. The floor plan should also identify the projection booth if a movie theatre is part of the facility.
State or local COVID occupancy restrictions demonstrating limits on occupancy
A copy of state or local ordinances that demonstrate the limitation on occupancy that affected the museum.
Talent Representative
Examples of Contractual/Consultant Agreements
Examples of contractual/consultant agreements with talent represented and venues used and evidence of booking. Not all contractual agreements will be needed but you may need to provide them as evidence for disbursements.
List of all individuals or acts represented
Cross walk listing for all individuals or acts represented and venues for which they were contracted to perform. This list should include all talent represented in 2019 and 2020, the venues for which they were contracted to perform and the performance dates. Note if the performance was canceled due to COVID.
SVO Grants vs PPP Loans
The SVO Grant program is intended specifically for eligible entities listed above. However, if a business received a PPP loan under the CARES act prior to December 27, 2020, it is eligible to apply for an SVO Grant. Businesses cannot apply for a SVO Grant and a PPP loan (either first draw or second draw) on or after December 27, 2020.
The SBA guidance indicates that entities cannot apply for a PPP loan and SVO grant at the same time. Entities must make an informed business decision as to which program will most benefit them. If, however, an entity is rejected by one program, it will then be eligible to apply for the other. Remember, the deadline to apply for PPP loans is March 31, 2021. Guidance does not specify a closing date for SVO grants as of the date of this article. Check back often as guidance is updated.
Some Terms Defined:
Gross earned revenue
SBA has indicated that gross earned revenue would only include receipts from the sale of goods or services. Other sources of funds that an organization may receive, such as donations, sponsorships, government assistance or returns on investments are not included in gross earned revenue.
The treatment of fundraising event receipts and non-profit memberships is similar to how they are treated for tax purposes. The portion of the amount which represents the estimated value of the good or service received is considered earned gross revenue. The amount paid that exceeds the estimated value of the good or service would be a donation, however, and is excluded from earned gross revenue.
For example, a ticket to a fundraising dinner costs $100 per person and the estimated value of the dinner is $60 then $60 of the funds would be considered earned gross revenue and the remaining $40 would be a donation.
Employee Count Explained
Employees that work at least 30 hours per week are considered full-time. Someone who works between 10 and 29 hours per week is considered to be one-half of a full-time employee. Anyone who works less than 10 hours per week is not considered an employee.
Average monthly employee count is calculated by summing the number of full-time equivalent employees in each month and dividing by the number of months.
The stimulus act, enacted in December 2020, established the Shuttered Venue Operators Grant Program. Shuttered venues, such as theaters and museums are ineligible for loans under the paycheck protection programs, or PPP. The shuttered venue operators (SVO) grant program authorizes up to $15 billion in grants to eligible entities. The Small Business Administration, or SBA will administer the SVO grant program.
Eligible applicants may qualify for SVO grants equal to 45% of their gross earned revenue, with a maximum single grant of $10 million. $2 billion is reserved for eligible applicants with up to 50 full-time employees.
Guidance
The SBA is in the process of setting up the grant program and is not yet accepting applications. SBA issued guidance in the form of frequently asked questions on January 27, 2021, which was revised and expanded on March 5, 2021. This post updates and revises my previous post on SVO grants. I’ll summarize the program below, but you should read the document if you think the program applies to your business.
SBA also released a Preliminary Application Checklist on March 5, 2021. SBA said that the SVO grant application process is still under development and the list is subject to further refinement.
On February 18, 2021, SBA released a video webinar explaining how to register in the System for Award Management (SAM). As explained below, registration in SAM is required to apply for a SVO grant.
This article is general in nature, and is not intended to provide specific advice to you or your business. You should consult with your financial and legal advisors. However, I’m happy to answer questions. Please contact me if I can be of assistance.
What you should do now
As the SBA works on building the application platform, there are some things you can do to prepare to apply:
Register for a Dun & Bradstreet number (DUNS). A DUNS number is necessary to apply. If you do not have a DUNS number, you can apply by clicking the link. The site indicates a number can be issued within one business day.
All applicants must register in the System for Award Management (SAM). The SBA encourages you to obtain your DUNS number as soon as possible and register in SAM. You cannot use an individual Taxpayer identification number, an Employer identification number or other means of identification. The SAM registration process may take up to two weeks once submitted.
Review and gather the required documentation to support your (eventual) application. I’ve summarized the requirements below, but you should also refer to the official SBA guidance if you have any questions.
Stay up to date by frequently visiting www.sba.gov/svogrant or this website as guidance is updated and the application process is opened.
An otherwise eligible entity would become ineligible for SVO grants under the following types of circumstances:
It does not have a place of business located in the United States, does not operate primarily within the U.S., and does not make a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.
The firm was not in operation as of February 29, 2020
The company received a PPP loan (first draw or second draw) on or after December 27, 2020
It is a publicly traded corporation, or is majority owned and controlled by a publicly traded corporation
It presents live performances or sells products or services of a prurient sexual nature
More than 10% of its 2019 gross revenue came from the federal government (not counting disaster assistance)
It owns or operates venues, theaters, museums or talent agencies in more than one country
It owns or operates venues, theaters, museums or talent agencies in more then ten states AND it had more than 500 employees as of February 29, 2020
Allowable Use of Funds
Funds may be used for specific expenses, which include:
Payroll costs
Rent payments
Utility payments
Scheduled mortgage payments (not including prepayment of principal)
Scheduled debt payments on any indebtedness incurred in the ordinary course of business prior to February 15, 2020. Similar to mortgage payments, prepayment of principal is not an allowable use of funds.
Worker protection expenditures
Payments to independent contractors (not to exceed $100,000 in annual compensation per contractor)
Other ordinary and necessary business expenses, including maintenance costs
Administrative costs (including fees and licensing)
State and local taxes and fees
Operating leases in effect as of February 15, 2020
Insurance payments
Advertising, production transportation and capital expenditures related to producing a theatrical or live performing arts production. (May not be the primary use of funds)
Funds may not be used to:
Buy real estate
Make payments on loans that originated after February 15, 2020
Investments or loans
Contributions or other payments to, or on behalf of, political parties, political committees or candidates for election
Any other use prohibited by the SBA Administrator
Required Documentation
All Applicants
Background documents
Written statement of need and assurance
Required by statute and must include:
A good faith certification that the uncertainty of current economic conditions makes the grant necessary to support the ongoing operations of the eligible person or entity.
If the entity is currently in operation, must state that the entity will remain in operation after receipt of the funds.
If the entity is shuttered, the statement shall include the intent to reopen with an estimated reopening date.
All statements shall include an assurance that the entity was fully operational on February 29, 2020, and that the funds will only be used for the allowable purposes.
.Corporate Documents
May include Articles of Incorporation, Certificate of Existence, Certificate of Organization, State LLC Agreement, Certificate of Formulation or Articles of Information.
Government issued photo ID – front and back
A copy of a photo ID. This could be a state driver’s license, passport book, passport card, US military or military dependent ID, US permanent resident card, etc.
Employee list with job titles and employee status (full or part-time)
A complete listing of all who work for the entity at the time of application. This is separate from the official payroll record. Each employee must include:
Complete name
Description of employee*:
Status:
full-time
part-time
temporary
employee agency
leasing concern
union agreement
co-employed pursuant to a professional employer organization agreement
salaried
included in payroll
not included in payroll
owner, officer or shared with affiliate.
Number of hours employee works per month
Tax exempt status letter
only required for non-profit entities
also known as an IRS determination letter.
The description of employee requirement can be tricky, some individuals may require multiple designations in the description. Some examples given by SBA: “Jane Smith – owner, salaried, included in payroll” and “Joe Smith, owner, not included in payroll, shared with affiliate.”
Financial documents
2019 Tax Return
If in operation for any portion of 2019, provide a copy of the entity’s 2019 tax return.
2020 Tax Return, if filed
If not already filed, provide to SBA when filed with the IRS.
Quarterly Income Statements for 2019 and 2020
Must demonstrate all sources of revenue and expenditures.
If not in business for all of 2019, include statements for the quarters it was in operation.
Copy of most recently Audited Financial Statement (2019) or Single Audit (if applicable) or link to website where the report can be located
Unofficial guidance is that this is required for grants of $750,000 or more.
If the period audited is older than six months, include interim Income Statement and Balance Sheet (certified by an officer of the organization).
Indirect cost rate agreement with cognizant agency (if applicable)
Attach current indirect cost rate agreement, if one is in place.
May negotiate a proposed rate to be negotiated.
If negotiated cost rate agreement was never in place, a 10% de minimus rate.
Payroll statements covering the pay period including February 29, 2020.
Certifies the entity will comply with all applicable requirements of the federal laws, executive orders, regulations and policies governing the grant program.
Certification regarding lobbying and disclosure of lobbying activities.
Applicant-Specific Documents
Live venue operator or promoter, theatrical producer, or live performance arts organization operator
Floor plan (and plan of grounds if outdoor space is used for the performance venue)
Provide the floor plan used for insurance purposes or local fire inspections. Floor Plan (and plan of grounds if outdoor space is used for the performance venue) should demonstrate the location of the defined performance space.
Documents to show that the venue has audio mixing equipment, a public address system, and a lighting rig.
This can include receipts for purchase or installation, or insurance documents covering the items.
Marketing materials
Include copies of print or electronic advertising, paid receipts for advertising, social media pages, etc. that list event or motion picture titles, show times and dates, and ticket price or entry requirement.
Box office / ticketing report
Report listing event title, show time, ticket price and number of tickets sold.
Provide the report for all February 2020 performances.
If the venue was in operation but had no performances in February 2020, select one month between January 2019 and January 2020.
Motion Picture Theatre Operator
Floor Plan
Provide the floor plan used for insurance purposes or local fire inspections. Floor Plan (and plan of grounds if outdoor space is used for the performance venue) should demonstrate the location of the defined performance space. The floor plan should also identify the projection booth.
Marketing Materials
Include copies of print or electronic advertising, paid receipts for advertising, social media pages, etc. that list event or motion picture titles, show times and dates, and ticket price or entry requirement.
Box office / ticketing report
Report listing event title, show time, ticket price and number of tickets sold.
Provide the report for all February 2020 performances.
If the venue was in operation but had no performances in February 2020, select one month between January 2019 and January 2020.
Museum
Floor Plan
Provide the floor plan used for insurance purposes or local fire inspections. Floor Plan (and plan of grounds if outdoor space is used for the performance venue) should demonstrate the location of the defined performance space. The floor plan should also identify the projection booth if a movie theatre is part of the facility.
State or local COVID occupancy restrictions demonstrating limits on occupancy
A copy of state or local ordinances that demonstrate the limitation on occupancy that affected the museum.
Talent Representative
Examples of Contractual/Consultant Agreements
Examples of contractual/consultant agreements with talent represented and venues used and evidence of booking. Not all contractual agreements will be needed but you may need to provide them as evidence for disbursements.
List of all individuals or acts represented
Cross walk listing for all individuals or acts represented and venues for which they were contracted to perform. This list should include all talent represented in 2019 and 2020, the venues for which they were contracted to perform and the performance dates. Note if the performance was canceled due to COVID.
SVO Grants vs PPP Loans
The SVO Grant program is intended specifically for eligible entities listed above. However, if a business received a PPP loan under the CARES act prior to December 27, 2020, it is eligible to apply for an SVO Grant. Businesses cannot apply for a SVO Grant and a PPP loan (either first draw or second draw) on or after December 27, 2020.
The SBA guidance indicates that entities cannot apply for a PPP loan and SVO grant at the same time. Entities must make an informed business decision as to which program will most benefit them. If, however, an entity is rejected by one program, it will then be eligible to apply for the other. Remember, the deadline to apply for PPP loans is March 31, 2021. Guidance does not specify a closing date for SVO grants as of the date of this article. Check back often as guidance is updated.
Some Terms Defined:
Gross earned revenue
SBA has indicated that gross earned revenue would only include receipts from the sale of goods or services. Other sources of funds that an organization may receive, such as donations, sponsorships, government assistance or returns on investments are not included in gross earned revenue.
The treatment of fundraising event receipts and non-profit memberships is similar to how they are treated for tax purposes. The portion of the amount which represents the estimated value of the good or service received is considered earned gross revenue. The amount paid that exceeds the estimated value of the good or service would be a donation, however, and is excluded from earned gross revenue.
For example, a ticket to a fundraising dinner costs $100 per person and the estimated value of the dinner is $60 then $60 of the funds would be considered earned gross revenue and the remaining $40 would be a donation.
Employee Count Explained
Employees that work at least 30 hours per week are considered full-time. Someone who works between 10 and 29 hours per week is considered to be one-half of a full-time employee. Anyone who works less than 10 hours per week is not considered an employee.
Average monthly employee count is calculated by summing the number of full-time equivalent employees in each month and dividing by the number of months.
Shuttered venues, such as theaters and museums are ineligible for loans under the paycheck protection programs, or PPP. Instead, the stimulus act established the Shuttered Venue Operators (SVO) Grant program. The SVO program includes $15 billion in grants to shuttered venues. The Small Business Administration will administer the SVO grant program.
Eligible applicants may qualify for SVO grants equal to 45% of their gross earned revenue, with a maximum single grant of $10 million. $2 billion is reserved for eligible applicants with up to 50 full-time employees.
The SBA is in the process of setting up the grant program and is not yet accepting applications. However, SBA issued guidance in the form of frequently asked questions on January 27, 2021. I’ll summarize it below, but you should read the document if you think the program applies to your business.
On February 18, 2021, SBA released a video webinar explaining how to register in the System for Award Management (SAM). As explained below, registration in SAM is required to apply for a SVO grant.
For more information about the PPP, see my recent article, PPP Loans: The Sequel is Better!. Note that this blog post will not be updated as circumstances change. For up-to-date information about the SVO grant program, the PPP and the Employee Retention Credit see my Guide to Recovery Resources.
This article is general in nature, and is not intended to provide specific advice to you or your business. You should consult with your financial and legal advisors. However, I’m happy to answer questions. Please contact me if I can be of assistance.
What you should do now
As the SBA works on building the application platform, there are some things you can do to prepare to apply:
Register for a Dun & Bradstreet number (DUNS). A DUNS number is necessary to apply. If you do not have a DUNS number, you can apply by clicking the link. The site indicates a number can be issued within one business day.
All applicants must register in the System for Award Management (SAM). The SBA encourages you to obtain your DUNS number as soon as possible and register in SAM. You cannot use an individual Taxpayer identification number, an Employer identification number or other means of identification. The SAM registration process may take up to two weeks once submitted.
Gather documents that demonstrate your number of employees and monthly revenues so you can calculate the average number of qualifying employees you had over the prior 12 months.
Determine the extent of gross earned revenue loss you experienced between 2019 and 2020. Firms not in operation in 2019 may qualify for an SOV grant if their gross earned revenues for the second, third or fourth quarter of 2020 demonstrate a reduction of not less than 25% from their gross earned revenue from the first quarter of 2020.
Other information such as floor plans, contract copies and other evidence will be needed to apply for an SOV grant.
Stay up to date by frequently visiting www.sba.gov/coronavirusrelief or this website as guidance is updated and the application process is opened.
Eligible Entities
The business must have been in operation as of February 29, 2020
Eligible Entities include:
live venue operators or promoters
theatrical producers
live performance arts organization operators
museum operators
motion picture theater operators
talent representatives
Ineligible Entities
An otherwise eligible entity would become ineligible for SVO grants under the following types of circumstances:
It does not have a place of business located in the United States, does not operate primarily within the U.S., and does not make a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.
The firm was not in operation as of February 29, 2020
The company received a PPP loan (first draw or second draw) on or after December 27, 2020
It is a publicly traded corporation, or is majority owned and controlled by a publicly traded corporation
It presents live performances or sells products or services of a prurient sexual nature
More than 10% of its 2019 gross revenue came from the federal government (not counting disaster assistance)
It owns or operates venues, theaters, museums or talent agencies in more than one country
It owns or operates venues, theaters, museums or talent agencies in more then ten states AND it had more than 500 employees as of February 29, 2020
Allowable Use of Funds
Funds may be used for specific expenses, which include:
Payroll costs
Rent payments
Utility payments
Scheduled mortgage payments (not including prepayment of principal)
Scheduled debt payments on any indebtedness incurred in the ordinary course of business prior to February 15, 2020. Similar to mortgage payments, prepayment of principal is not an allowable use of funds.
Worker protection expenditures
Payments to independent contractors (not to exceed $100,000 in annual compensation per contractor)
Other ordinary and necessary business expenses, including maintenance costs
Administrative costs (including fees and licensing)
State and local taxes and fees
Operating leases in effect as of February 15, 2020
Insurance payments
Advertising, production transportation and capital expenditures related to producing a theatrical or live performing arts production. (May not be the primary use of funds)
Funds may not be used to:
Buy real estate
Make payments on loans that originated after February 15, 2020
Investments or loans
Contributions or other payments to, or on behalf of, political parties, political committees or candidates for election
Any other use prohibited by the SBA Administrator
SVO Grants vs PPP Loans
The SVO Grant program is intended specifically for eligible entities listed above. However, if a business received a PPP loan under the CARES act prior to December 27, 2020, it is eligible to apply for an SVO Grant. Businesses cannot apply for a SVO Grant and a PPP loan (either first draw or second draw) on or after December 27, 2020.
The SBA guidance indicates that entities cannot apply for a PPP loan and SVO grant at the same time. Entities must make an informed business decision as to which program will most benefit them. If, however, an entity is rejected by one program, it will then be eligible to apply for the other. Remember, the deadline to apply for PPP loans is March 31, 2021. Guidance does not specify a closing date for SVO grants as of the date of this article. Check back often as guidance is updated.
Some Terms Defined:
Gross earned revenue
SBA has indicated that gross earned revenue would only include receipts from the sale of goods or services. Other sources of funds that an organization may receive, such as donations, sponsorships, government assistance or returns on investments are not included in gross earned revenue.
The treatment of fundraising event receipts and non-profit memberships is similar to how they are treated for tax purposes. The portion of the amount which represents the estimated value of the good or service received is considered earned gross revenue. The amount paid that exceeds the estimated value of the good or service would be a donation, however, and is excluded from earned gross revenue.
For example, a ticket to a fundraising dinner costs $100 per person and the estimated value of the dinner is $60 then $60 of the funds would be considered earned gross revenue and the remaining $40 would be a donation.
Employee Count Explained
Employees that work at least 30 hours per week are considered full-time. Someone who works between 10 and 29 hours per week is considered to be one-half of a full-time employee. Anyone who works less than 10 hours per week is not considered an employee.
Average monthly employee count is calculated by summing the number of full-time equivalent employees in each month and dividing by the number of months.
Yesterday, January 19, 2021, the U.S. Small Business Administration, or the SBA released form 3508S, a simplified PPP loan forgiveness application form. The SBA also announced that the paycheck protection program is now open to all participating lenders. The deadline to apply for PPP loans is March 31, 2021.
Form 3508S is a simplified one-page form that be used to apply for forgiveness of paycheck protection program, or PPP first-draw or second-draw loan of $150,000 or less. Borrowers do not need to file supporting documentation along with form 3508S. However, PPP rules require that borrowers retain supporting employment records for four years, and other supporting records for three years. The SBA may request additional information for the purpose of evaluating a borrower’s eligibility for the PPP loan and for loan forgiveness.
On January 19, 2021, The SBA also announced it had approved 60,000 PPP loans submitted by nearly 3,000 lenders for over $5 billion. The SBA’s PPP loan application portal opened on January 15. Initially, the portal was limited to community-based lenders that specialize in serving underserved communities.
This article is obviously general in nature. I am not offering specific advice to you or your company. You should always discuss these matters with your company’s accounting, financial and legal advisors. If I can be of assistance, or you have any questions, criticisms or suggestions, please contact me. I’m always happy to help.
The SBA re-opened its PPP loan portal on Monday, January 11. Initially, the portal will only accept first draw PPP loan applications from Community Development Financial Institutions, Minority Depository Institutions, Certified Development Companies and Microloan Intermediaries. I’ll try to keep this site updated when the portal opens up for all borrowers, or you can visit the SBA’s PPP site.
Applications for PPP loans will be accepted through March 31, 2021.
For up-to-date information about the PPP program, see my Guide to Recovery Resources. Briefly, a company is eligible as a first-draw borrower if it did not receive an earlier PPP loan, and meets eligibility requirements as a small business. Second-draw loans are targeted toward the hardest-hit businesses who previously received a PPP loan but are in need of additional assistance.
Lender Alternatives
One development to the updated PPP program is that lender options have expanded beyond banks. Small businesses often find the larger banks are not responsive to small customers. Small community banks are often a better alternative for SBA loans, but if you don’t have a strong relationship with a small bank using a Fintech lender is now an option. The Fintech lenders usually have portals that directly interface with the SBA and can often provide same-day approval. Talk to your CPA about your options.
This article is obviously general in nature. I am not offering specific advice to you or your company. You should always discuss these matters with your company’s accounting, financial and legal advisors. If I can be of assistance, or you have any questions, criticisms or suggestions, please contact me. I’m always happy to help.
Ever notice that sometimes the sequel is better than the original release? The second paycheck protection program, or PPP-2 not only provides for a second round of forgivable SBA loans to small businesses, but it also cleans up some issues from the original PPP contained in the CARES act.
The president signed the Economic Aid Act, a $900 billion stimulus act, into law on December 27, 2020. Contained within the Economic Aid Act, PPP-2 authorizes $325 billion in relief for small businesses in the form of forgivable loans from the Small Business Administration, or SBA.
An important thing to note here is that obviously this article is general in nature. I am not offering specific advice to you or your company. You should always discuss these matters with your company’s accounting, financial and legal advisors. If I can be of assistance, or if you have any questions, criticisms or suggestions, please contact me. I’m always happy to help.
Release of Interim Final Rules (IFRs)
Late last night (January 6, 2021), the SBA released interim final rules implementing the Economic Aid Act:
This document consolidates the IFRs and important guidance issued to date regarding borrower eligibility, lender eligibility, and PPP application and origination requirements for new PPP loans
Also defines general rules relating to loan increases and loan forgiveness
Significant changes from the original version of this article will appear in red text. The changes reflected in today’s update (January 7) are the highlights based on a preliminary review, and additional details will be added over the coming days.
Instead of updating all of the blog posts when new information becomes available, I’ve created a Guide to Recovery Resources for up-to-date information on the PPP, the Employee Retention Credit and the Shuttered Venue Operators Grant program, all in one place.
If you are interested in this topic, my suggestion is that you consider subscribing to my updates. It is free, and I promise I will respect your privacy and not sell or otherwise share your contact information without your consent.
Clean-up of CARES Act
When Congress passes a major program, like the CARES act, it lays out the game. However, the detailed regulations are defined by the federal bureaucracy: the Treasury Department, the Internal Revenue Service and the Small Business Administration among others. The regulations are usually drafted to try to be consistent with other regulations which in many cases is what Congress intends. In the case of the CARES act, however, the intent was to provide relief and support for businesses. A significant impact of the Economic Aid Act clarifies the intent of Congress for the regulators. Accordingly, guidance and regulations for the original PPP program are being revised.
Tax Implications of PPP Loan Forgiveness
The general rule is that loan amounts forgiven are included in taxable income. The Economic Aid Act provides that taxable gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. This provision is effective as of the date of the CARES act. Therefore, loan forgiveness of either original PPP loans or PPP-2 loans does not result in taxable income. This is an important clarification. To implement this provision, the IRS has issued Rev. Ruling #2021-2. See above.
Deductibility of Expenses
Previous guidance was that expenses paid with the proceeds of PPP loans that were forgiven were not deductible for federal income tax purposes. The Economic Aid Act provides that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven. This provision is also effective as of the date of the CARES act. Accordingly, expenses that would otherwise be deductible remain deductible whether or not they were paid from the proceeds of either an original PPP loan or a PPP-2 loan that is forgiven. To implement this provision, the IRS has issued Rev. Ruling #2021-2. See above. Another huge win for small businesses.
Repeal EIDL Advance deduction from PPP forgiveness
An EIDL Advance was a grant program offered together with the economic injury disaster loan, or EIDL program. Under previous guidance, amounts received as an EIDL Advance were deducted from the amount of a PPP loan that could be forgiven. For example, if a company received a $10,000 EIDL Advance and a $100,000 PPP loan, then only $90,000 of the PPP loan could be forgiven and the remaining $10,000 would have to be repaid. The result was an unpleasant surprise for borrowers under the PPP program when applying for loan forgiveness.
The Economic Aid Act provides that the entire PPP loan amount remains forgivable. Again, the effective date of the provision is as of the CARES act, so it would retroactively change the forgivable amounts of original PPP loans. If you had an EIDL Advance and have already applied for loan forgiveness under the original PPP program then the forgivable amount of your loan should be unaffected by the EIDL Advance.
Changes to Loan Forgiveness
There are newly eligible expenses defined in the PPP-2 program that also apply to original PPP loans, unless forgiveness has already been processed. See below.
Second Draw Loans
The recent stimulus act also provides $284.5 billion for a second round of paycheck protection program loans, which I’ll refer to as PPP-2. The program is similar to the original PPP under the CARES act, but with some important differences. The first group of IFRs have recently been issued. Forms and additional guidance can be expected in the very near future. As I said above, the situation is fluid and final regulations and forms have not been issued so check back often to keep up to date. Companies who received PPP loans may be eligible for a second loan, called a second draw loan. There is also $35 billion reserved for 1st time borrowers.The last day to apply for 1st or 2nd draw PPP-2 loans is March 31, 2021.
Second Draw Eligibility
PPP-2 second draw loans are targeted for the hardest hit borrowers. There are four major requirements to be eligible:
The business must have been in operation on February 15, 2020.
Generally, 300 or fewer employees.
For businesses with multiple locations, not more than 300 employees per physical location.
A decline in gross receipts of 25% in any quarter in 2020 compared with the same quarter in 2019.
Loans received under EIDL or the original PPP are not included in gross receipts
At this point, it appears that calendar quarters are to be used, but again final regulations are pending
Gross receipts is defined as all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source including:
Sales of products or services
Interest and dividends
Rents
Royalties
Fees
Commissions
Reduced by returns and allowances
Comparison methods will differ for borrowers who were not in operation the entire year of 2019.
If forgiveness amount of a first draw PPP loan is recorded in calendar year 2020 revenue it is excluded from the gross receipts comparison.
The January 6 IFR provides an alternative approach to calculating the decline in gross receipts. A borrower that was in operation in all four quarters of 2019 can compare total annual receipts in 2020 to annual receipts in 2019 rather than doing a quarter-by-quarter comparison. Under this alternative approach, copies of annual tax forms substantiating the revenue decline would be submitted.
A borrower must certify that it has used or will use the full amount of first draw funds only for eligible expenses. This is a significant change from the guidance contained in the original article.
Ineligible Entities
The following types of organizations are ineligible for PPP-2 loans:
An entity that has permanently closed.
Entities receiving Shuttered Venue Operator Grants. These grants are provided for in the law, but are beyond the scope of this article.
Publicly-traded businesses
Lobbying organizations
Hedge funds or private equity funds
Entities affiliated with the People’s Republic of China
Those registered under the Foreign Agents Registration Act
The President, Vice President, head of an Executive department, Member of Congress or their spouse
Household employers
Entities in bankruptcy
The above list is not comprehensive, however. You should check with your accountant or legal advisors as to your company’s eligibility.
Second Draw Loan Amounts
The maximum loan amount for second draw borrowers under PPP-2 is $2 million. As a general rule, a company’s maximum loan amount is calculated at 2.5 times their average monthly payroll costs. Companies can use either their 2019 payroll amounts, or the 12-months prior to application to calculate average monthly payroll. Using 2019 could be beneficial to companies who have reduced payroll costs during 2020. Companies who have been in operation less than 12 months would use the average monthly payroll costs for the period of operation.
Restaurants, hotels and other businesses in NAICS code 72, Accommodation and Food Services, are eligible for 3.5 times their average monthly payroll costs.
Seasonal employers can look at any 12-week period from February 15, 2019 through February 15, 2020. A seasonal employer is one who operates for no more than seven months in a year or who earned no more than 1/3 of its receipts in any six months in the prior calendar year.
Second Draw Documentation
Generally, the same as documentation required for first draw PPP loans. No additional documentation to substantiate payroll costs will be required if:
The borrower used calendar year 2019 figures to determine its first draw and second draw loan amount and
The lender is the same
For loans over $150,000, documentation to support a revenue decline must be submitted with the application. Acceptable documentation would include:
Relevant tax forms, including annual tax forms
If relevant tax forms are not available, quarterly financial statements or bank statements
For loans of $150,000 or less, documentation is not submitted with the loan application but must be submitted on or before the date the borrower applies for loan forgiveness.
Second Draw Process
A borrower must submit to the lender SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form). This form is not yet available as of today (January 7, 2021). Check back for updates.
The lender will submit a request through the SBA’s website to increase the PPP loan amount, even if the loan has been fully disbursed. In addition to the $2 million second draw loan amount, in no event can the increased loan amount exceed the maximum PPP loan amount ($10 million for an individual borrower or $20 million for a corporate group).
The borrower must provide the lender with required documentation to support the calculation of the increase.
Second Draw Certifications
As part of the loan application, the borrower will be required certify:
It has not and will not receive another second draw
The borrower realized a reduction in gross receipts in excess of 25% relative to the relevant comparison time period
The borrower has used or will use first draw proceeds only for eligible expenses
To maximize loan forgiveness, the borrowed funds have to be spent on eligible expenses during the covered period. Under PPP-2, a borrower can choose a covered period that is between 8 and 24 weeks. Under the original PPP, the covered period had to be specified as either 8 or 24 weeks, but under PPP-2 it can be any period between.
The covered period for all PPP loans is extended from December 31, 2020 to March 31, 2021.
First Draw Borrowers
As noted above, $35 billion has been set aside for first time borrowers. The maximum loan amount for first draw borrowers is the lesser of 2.5 times average monthly payroll costs and $10 million for an individual borrower. The list of eligible first draw borrowers is a bit more extensive than second draw borrowers:
Eligible First Draw Borrowers
Generally, businesses with 500 or fewer employees that are eligible for SBA 7(a) loans
Sole proprietors, independent contractors, and eligible self-employed individuals
Any business that averages less than 500 employees per physical location that has a NAICS code starting with 72 (accommodation and food services)
Nonprofits, including churches
501(c)(6) and destination marketing organizations
300 or fewer employees
Chambers of commerce, economic development, tourism
Subject to lobbying threshold:
15% of receipts
15% of activities
$1 million total
Certain news organizations
Housing cooperatives
Other
$25 billion has been set aside for borrowers with 10 or fewer employees, or loans less than $250,000 in low-income areas.
Farmers and ranchers who file on Schedule F can use gross income instead of net. Loans can be recalculated if it would result in a larger loan. This applies to all PPP loans unless the loan has already been forgiven.
Borrowers who returned all or part of their original loans may reapply for the difference if they have not received forgiveness.
Borrowers whose loan amount was impacted by changing guidance can modify their loan amount even if the loan has been fully disbursed.
Guidance from the SBA is expected very soon, so check back for updates to the above.
PPP Loan Forgiveness
A PPP loan (or PPP-2 loan) can be all or partially forgiven to the extent that proceeds were used to pay eligible expenses. At least 60% of the eligible expenses must be for payroll costs and the remaining 40% for eligible non-payroll costs.
Payroll Costs
Payroll costs include salaries and wages and certain benefits costs including group life, disability, vision and dental insurance.
Eligible Non-Payroll Costs
Mortgage interest
Rent
Utilities
Worker protection expenditures such as personal protection equipment and costs to comply with COVID-19 federal health and safety guidelines
Expenditures to a supplier that are essential to the company’s current operations
Operations expenditures such as software, cloud computing and other HR or accounting costs
Covered property damage costs related to 2020 public disturbances not covered by insurance or other compensation.
Simplified Forgiveness
There is a provision for simplified loan forgiveness for loan amounts up to $150,000. Applicants for simplified forgiveness will need to sign and submit a one-page form:
Attest to complying with PPP requirements
The Loan amount
The number of employees retained
Estimate of loan amount spent on payroll
There will also be a requirement to retain records up to four years for employment costs and three years for other. It is very important to assemble and retain good documentation.
You may be required to document a substantial loss of revenue. It is unclear at the moment what forms of documentation will be required.
Timing
The law contains deadlines for the various regulatory groups to issue forms and guidance. As noted above, IFRs were released last night (January 6, 2021). Forms and additional guidance is expected to be relased over the next few days. My best guess is that the SBA will begin accepting applications mid-January.
I hope the above is informative. I will endeavor to keep it current as guidance and forms are issued so please check back. As always, you can subscribe to be notified when updates are issued.
As we approach year-end, its time to think about your company’s annual financial statements. If your company prepares its financial statements using generally accepted accounting principles, or GAAP, then at least annually you should evaluate your company’s assets for indications of impairment. For more information on GAAP requirements, consult the Accounting Standards Codification of the Financial Accounting Standards Board, or FASB.
Remember, this article is general in nature, and is not intended to give specific advice to you or your company. You company’s financial statement disclosures will be dictated by your specific facts and circumstances. Always consult with your accountant.
What is asset impairment?
A fundamental accounting principal is that the carrying value of an asset, should be less than or equal to its fair value. If an asset’s carrying value is greater than its fair value, then it is impaired.
Sounds simple enough, right? Unfortunately, in practice it can be difficult and even expensive to determine an asset’s fair value. Since frequently there is no active market for a particular asset, the fair value has to be estimated using valuation techniques. Valuation is a topic that is beyond the scope of this article, but as a general rule fair values are strongly related to expected future cash flows. I’ll talk about valuation in more detail in the future. For the purposes of this discussion, let’s assume that you will retain a valuation expert to assist.
During 2020 we have seen major disruptions to economic activity. Lockdowns and changes in buying habits have in some cases significantly changed the prospects of entire sectors of the economy for the foreseeable future. It would be misleading to issue financial statements that don’t reflect that reality.
If your company has outstanding debt, and is bound by financial covenants, be mindful that recording the impairment of assets could affect compliance with some of those covenants. It is a good idea to perform impairment testing early in the process of preparing financial statements in case you need to discuss the result with your lender(s).
Some definitions
Before we go further, let’s define a few terms:
An asset’s carrying value is the value at which the asset is reported on the company’s balance sheet. Carrying value is often, but not always, the original cost of the asset. For assets that are depreciated or amortized, like equipment, the carying value would be net of accumulated depreciation.
An asset’s fair value is the amount at which an asset could be bought or sold between willing unrelated parties in an orderly transaction. An orderly transaction is one that is not a forced or liquidation sale. Think of it as the current market price.
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.
Assets to consider
For this discussion, we will focus on three categories of assets:
Indefinite-lived intangible assets. These are intangible assets that have an indefinite life. Often, intangible assets will arise from an acquisition. Some examples would be:
an acquired broadcast license which is renewable
an acquired airline route
an acquired trademark deemed to have an indefinite useful life.
These types of assets should be evaluated at least annually, or more frequently if impairment indicators exist. Using the example of the acquired airline route, the disruptions to air travel caused by the pandemic would be an example of an impairment indicator. This category of assets is always evaluated first.
Long-lived assets to be held and used. Assets such as property and equipment, or intellectual property with a finite useful life would fall into this category. These types of assets would not be evaluated on any schedule, but when impairment indicators exist. This category of assets would be evaluated after the indefinite-lived intangible assets.
Goodwill. Goodwill should be evaluated annually, or more frequently if impairment indicators exist. It is evaluated last in the process.
An alternative is available for private companies. If a company adopts the alternative accounting for goodwill, it should be disclosed as an accounting policy in the footnotes to the financial statements. A private company which adopted the goodwill alternative accounting would amortize goodwill over 10 years. Goodwill is only evaluated for impairment upon a triggering event. There is a potential pitfall, however. If a company has elected to use the private company alternative accounting method and subsequently decides to go public, it would be required to test goodwill for impairment for each of the historical balance sheets presented in its initial public filings.
A Case Study
The best way to explain the impairment evaluation process would be to look at an example.
Case background
Heartburn, Inc. is a company that operates restaurants and food-service businesses under a number of brands throughout the U.S. In early 2019, Heartburn acquired the assets of Greasy-Spoon Dining, a chain of casual restaurants for a purchase price of $20 million plus inventory. The purchased assets included trademarks and equipment. Heartburn retained a team of valuation experts, and the purchase price was allocated to the assets based on their fair values as summarized in figure 1 below. The total fair value of purchased assets that could be separately identified was $17.5 million. Goodwill of $2.5 million was recorded by Heartburn.
Figure 1. Allocation of purchase price to assets
2019 was a banner year for Heartburn, with strong sales and solidly-profitable operations. In 2020, however, many of its locations were forced to close, or operate at greatly-reduced capacity. Heartburn operated at a loss in 2020, and it projects continuing losses through 2021 with a return to profitability in 2022.
Considerations at year-end 2020:
Fortunately, Heartburn has sufficient cash resources and borrowing capacity to fund its operations, and has concluded that it should be able to continue as a going concern. As it prepares its financial statements, Heartburn needs to evaluate its long-lived assets for possible impairment.
The first consideration: are there indications of impairment? Clearly there are:
Many of the restaurant locations are closed or operating at reduced capacity
There has been a substantial decline in cash flows from operations
Heartburn’s forecasts project continued losses for at least a year, with recovery beginning in 2022.
These are all indications of impairment. Remember, the fair value of long-lived assets is strongly associated with the expectation of future cash flows. Under these circumstances, it is likely that the fair values of Greasy-Spoon’s assets have declined.
Recording impairment losses
Heartburn retained a valuation expert to assess the fair value of its assets associated with Greasy-Spoon. The expert looked at Heartburn’s forecasts, current operating trends and other market measures and estimated an overall fair value of Greasy-Spoon of $15 million:
The fair value of the trademarks was estimated to be $4 million.
Greasy-Spoon has strong name-recognition in its market and the trademark still has substantial value.
Heartburn would record a loss of $1 million on the decline in fair value of its trademark assets.
The fair value of the restaurant equipment was estimated to be $9.5 million.
The pandemic has had a substantial adverse impact on the entire restaurant industry, resulting in many closures. There is a glut of used restaurant equipment available resulting in reduced prices for used equipment.
Heartburn would report a loss of $1.25 million due to the decline in fair value of its equipment. See figure 2, below.
Figure 2. Restaurant Equipment
After taking into consideration the changes in estimated fair values for the trademarks and the restaurant equipment, the carrying value of Greasy-Spoon’s assets other than goodwill would be $13.5 million. Since the fair value of the entire operation is $15 million, $1.5 million of goodwill would remain while $1 million of goodwill would be considered impaired. See Figure 3, below.
Figure 3. Goodwill impairment calculation
Conclusion
Companies who issue financial statements under generally accepted accounting principles are required to evaluate long-lived or indefinite lived intangible assets for impairment at least annually, and long-lived tangible assets such as equipment whenever indications of impairment occur. In “normal” years, unless there has been a material disruption to either the company or its industry, this has been a fairly straightforward process. 2020, however, has been anything but “normal” and many companies and industries see clear indicators of possible impairment.
It is a good idea to begin this evaluation as soon as possible, particularly if compliance with financial covenants is an issue. Start by visiting with your accountant. If necessary, retain a competent valuation expert to assist.
This article is part of the Accounting in Plain English project. The Accounting in Plain English project is dedicated to trying to make the complex simple and understandable. That is, translate the language of accounting back into plain English. This is not an education site for accountants, it is intended for company management along with users and readers of financial statements. The intent is not to turn you into an accountant, but to help you avoid being confused by one.
Finally, if you have any questions or suggestions please let me know. If I can be of assistance in this or any other financial reporting matter, please contact me. I’m always happy to help.
