Loan and lease modifications
As a result of the impact of COVID-19, lenders and borrowers may enter into an agreement to modify the terms of financial instruments such as loans. These modifications may take the form of reduced interest rates, modification to payment terms and ‘grace periods’ for covenant violations.
From the borrower’s perspective, when the terms of an existing financial liability are substantially modified, the original financial liability is extinguished and a new financial liability is recognized. From the lender’s perspective, the restructuring of the terms of a loan receivable would be accounted for in accordance with Section PS 3050, Loans Receivable.
Additionally, some lenders may issue loans with significant concessionary terms. An assessment will need to be made of such loans to determine if they are more in the nature of a grant and should be expensed at the time the loan is made.
Public sector landlords may also offer concessions to lease tenants (e.g., rent-free periods, deferral of payment, cash payments from lessors to lessees) to compensate them for disruptions to operations due to COVID-19. PSAS does not provide specific guidance on accounting for lease modifications. As a result, professional judgment will need to be used.
Decreases in the fair value of plan assets as a result of COVID-19, coupled with changes in discount rates, could result in an increased retirement benefit liability on the financial statements of many public sector entities with defined benefit plans in current and future years. Public sector entities would need to consider whether a change in the discount rate used (i.e., changes to a public sector entity’s cost of borrowing or changes to plan asset earnings) in measuring the accrued benefit obligation for a defined benefit plan indicates a need for a new actuarial valuation to be completed.
Additionally, public sector entities may react to the COVID-19 crisis in a number of ways over the next couple years, which could impact the obligation for defined benefit plans (e.g., temporary
deviations, plan curtailments). In such cases, an entity will also need to determine whether an updated actuarial valuation is required.
Some public sector entities may downsize their workforce in the future in an effort to cut costs. A public sector entity recognizes termination benefits when it is demonstrably committed to either:
- terminate the employment of an employee or group of employees; or
- provide termination benefits as result of an offer made to encourage voluntary termination.
Refer to paragraphs .29-.31 of Section PS 3255, Post-employment Benefits, Compensated Absences and Termination Benefits, for guidance on when a public sector entity is demonstrably committed.
As public sector entities deal with the fallout of the COVID-19 pandemic and look for ways to save funds or make their operations more efficient, some entities may consider entering into restructuring transactions. For example, two smaller municipalities may decide to amalgamate, or one government not-for-profit organization may transfer its operations/programs to another government not-for-profit organization. There may be an increase in restructuring transactions over the next few years. Refer to our PSAB at a Glance: Section PS 3430 - Restructuring Transactions publication for additional information on accounting for such transactions and reach out to your BDO advisor if you are considering undertaking such a transaction.
In addition to the recognition and measurement considerations discussed previously, public sector entities must also consider the transparency of the financial statement disclosures overall.
Entities should exercise professional judgment to provide sufficient information about the extent and nature of the impact of COVID-19 on their financial position, results of operations, remeasurement gains and losses, changes in net debt, and cash flows.
Additionally, where measurement uncertainty exists around amounts recognized or disclosed in the financial statements, appropriate disclosure of this uncertainty should be included in the financial statements as required by Section PS 2130, Measurement Uncertainty.
Disclosures about the effects of the COVID-19 outbreak are also likely to appear in the narrative sections of the annual report, for entities that produce annual reports. Public sector entities need to ensure that such disclosures are consistent with those made in the financial statements and with wider current and forecasted economic and other conditions.
Other BDO resources available
This publication highlighted some of the main areas where public sector entities may be affected as a result of the impact of COVID-19; however, it is not a complete list. As a result, it is important to consider a public sector entity’s specific facts and circumstances related to COVID-19 when the financial statements are being prepared, to determine the appropriate financial reporting implications. For further information to assist you in responding to the impacts of COVID-19 on your entity, refer to our BDO COVID-19 Hub and our PSAS Knowledge Centre, and reach out to your BDO advisor.
To learn more, contact your local BDO partner or:
Sayja Barton, CPA, CA, MAcc
National Accounting Standards Director
The information in this publication is current as of September 30, 2020.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.