Tag: Implications

Going Concern Assessments And COVID-19 Implications

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Introduction to COVID-19 Impacts

COVID-19 is a new and evolving crisis, which has been labelled a pandemic by many countries and institutions, including the World Health Organization. The full impact of COVID-19 is yet to be determined, and to date has surprised most market observers how in a short period of time, it has wreaked havoc on the global economy as populations are ordered to stay home. As a result, business has ground to a halt in order to stop its spread. This has resulted in governments scrambling to provide stimulus packages hoping to revive their domestic economies.
 
The result of the above is that many entities across a wide variety of industries are facing extended closures, reduced access to customers, supply chain disruptions, difficulty collecting from customers and other counterparties, or other events that negatively affect operating cash flows and liquidity. The current uncertainty continues to evolve and will make it difficult for organizations to evaluate the impact on their ability to obtain, extend, or renew credit agreements, or they may experience a material adverse event, which could trigger debt to come due or other loan covenant violations. There is also uncertainty about access to other sources of capital and the ability to develop a reasonable forecast. These types of events will need to be considered in an entity’s going concern analysis.
 
Significant judgement will be required as no two entities fact patterns, even if operating in the same industry, will be the same, but at the end of the day it will come back to one central question, will the company have sufficient cash flows to meet their existing obligations and alleviate any conditions that raise substantial doubt about the ability to continue as a going concern. For both entities that have historically been profitable, have had ready access to liquidity, and no short-term obligations coming due, and those that are accustomed to evaluating going concern on a regular basis, the impacts of COVID-19 could create some significant challenges.

Financial Reporting Framework In accordance with ASC 205-40, in preparing financial statements for each annual and interim reporting period, management must evaluate whether there are conditions and events (e.g. COVID-19 crisis) that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued or available to be issued (when applicable), collectively referred to as “issued” throughout this document.

ASC 205-40 states that substantial doubt about an entity’s ability to continue as a going concern exists when in connection with preparing financial statements for each annual and interim reporting period, an entity’s management shall evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity ’s ability to continue as a going concern within one year after the date that the financial statements are issued .  T Therefore, management must evaluate whether it is likely that the entity will be unable to meet its obligations as they become due within the assessment period.

The following diagram illustrates how the two-step assessment is performed:

Step 1: Determine whether conditions and events raise substantial doubt
Management’s evaluation of an entity’s ability to continue as a going concern typically is based on conditions and events that are relevant to an entity’s ability to meet its obligations as they become due within one year after the date that the financial statements are issued. The COVID-19 crisis provides new known and unknown factors for management to consider when making this evaluation.
 
Management’s evaluation is based only on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued, and should be approved by those with proper authority, which for most public companies, would be their Board of Directors, or a special committee of the Board of Directors. The term “reasonably knowable” is intended to emphasize that an entity may not readily know all conditions and events, but management should make a reasonable effort to identify conditions and events that can be identified without undue cost and effort.
 
When evaluating an entity’s ability to meet its obligations, management should consider information about the following:

  • The entity’s current financial condition, including its liquidity sources (e.g., available liquid funds, available access to credit) at the date the financial statements are issued
  • The entity’s conditional and unconditional obligations due or anticipated within one year after the date that the financial statements are issued, regardless of whether they are recognized in the entity’s financial statements
  • The funds necessary to maintain the entity’s operations considering its current financial condition, obligations and other expected cash flows within one year after the date that the financial statements are issued
  • Other conditions and events, when considered in conjunction with the items listed above, that may adversely affect the entity’s ability to meet its obligations within one year after the financial statements are issued

Examples of adverse conditions and events that may raise substantial doubt about an entity’s ability to continue as a going concern.

  • Negative financial trends such as recurring operating losses, working capital deficiencies, negative cash flows from operating activities and adverse key financial ratios
  • Other indications of possible financial difficulties such as defaults on loans or similar agreements, arrearages in dividends, denials of usual trade credit from suppliers, a need to restructure debt to avoid default, noncompliance with statutory capital requirements and a need to seek new sources or methods of financing or to dispose of substantial assets
  • Forecasted debt covenant violations during the 12-month period even if no violation has occurred
  • Internal matters such as work stoppages or other labor difficulties, substantial dependence on the success of a project, uneconomic long-term commitments and a need to significantly revise operations
  • Internal matters such as work stoppages or other labor difficulties, substantial dependence on the success of a project, uneconomic long-term commitments and a need to significantly revise operations
  • External matters such as legal proceedings, legislation or similar matters that might jeopardize the entity’s ability to operate; supply chain disruptions; loss of a key franchise, license or patent; no or reduced purchases by  a principal customer, none or reduced quantities available for purchase from a supplier; and an uninsured or underinsured catastrophe such as a hurricane, tornado, earthquake or flood

Management must also consider the likelihood, magnitude and timing of the potential effects of any adverse conditions and events. This evaluation is required each reporting period.

Management’s evaluation of whether substantial doubt is raised (step 1) does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date that the financial statements are issued (step 2).

Step 2: Consider management’s plans if substantial doubt is raised
If conditions or events indicate that substantial doubt is raised, management is required to evaluate whether its plans that are intended to mitigate those conditions and events will alleviate substantial doubt.

ASC 205-40 specifies that management may consider its plans only when both of the following criteria are met:

  • It is probable that those plans will be effectively implemented
  • It is probable that the plans will mitigate the relevant conditions and events within one year after the financial statements are issued

Management plans that do not meet these criteria cannot be considered in the evaluation of whether substantial doubt is alleviated. These criteria prevent management from placing undue reliance on the potential mitigating effect of plans that are not probable of being implemented or succeeding. In other words, if events and conditions make it probable that the entity will be unable to meet its obligations as they become due, plans to mitigate those conditions must be likely to succeed (i.e., management’s plans must be probable of both being implemented and mitigating the events and conditions).

The evaluation of the first criterion (i.e., whether it is probable that management’s plans will be effectively implemented) is based on the feasibility of implementation of management’s plans considering an entity’s facts and circumstances and whether they make sense in light of other publicly available information (i.e. a manufacturing company plan includes mothballing a plant to preserve cash, but they have recently disclosed to investors the plant is key to achieving expected cost synergies which have not been eliminated in management’s plan).
 
The evaluation of the second criterion (i.e., whether it is probable that management’s plans will mitigate the events and conditions that raised substantial doubt) should consider the expected magnitude and timing of the mitigating effect. For example, if management concludes that substantial doubt is alleviated by its plan to restructure debt, management’s evaluation of the restructuring must consider whether:

  • The revised debt agreement would be effective within one year of the issuance of the financial statements
  • The terms of the revised agreement (e.g., debt payment schedule, interest rate) alleviate the relevant conditions and events (e.g., inability to make debt payments) with respect to both the amount and timing of payments due under the revised agreement

That is, management must be able to conclude that it is probable that the debt will be restructured and that the entity will be able to make the payments under the new debt agreement and all other obligations that are due within the year following the date the financial statements are issued
 
ASC 205-40 states that a plan to meet an entity’s obligations as they become due through liquidation is not considered part of management’s plans to alleviate substantial doubt, even if liquidation is probable.

The following are examples of plans that management may implement to mitigate conditions or events that raise substantial doubt, including the types of information management should consider in evaluating the feasibility of the plans:

  • Plans to dispose of an asset or business:
  • Restrictions on disposal of an asset or business, such as covenants that limit those transactions in loan or similar agreements, or encumbrances against the asset or business
  • Marketability of the asset or business that management plans to sell
  • Possible direct or indirect effects of disposal of the asset or business
  • Plans to borrow money or restructure debt:
  • Availability and terms of new debt financing, or availability and terms of existing debt refinancing, such as term debt, lines of credit or arrangements for factoring receivables or sales and leasebacks of assets
  • Existing or committed arrangements to restructure or subordinate debt or to guarantee loans to the entity
  • Possible effects on management’s borrowing plans of existing restrictions on additional borrowing or the sufficiency of available collateral
  • Plans to reduce or delay expenditures:
  • Feasibility of plans to reduce overhead or administrative expenditures, to postpone maintenance or research and development projects, or to lease rather than purchase assets
  • Possible direct or indirect effects on the entity and its cash flows of reduced or delayed expenditures
  • Plans to increase ownership equity:
  • Feasibility of plans to increase ownership equity, including existing or committed arrangements to raise additional capital
  • Existing or committed arrangements to reduce current dividend requirements or to accelerate cash infusions from affiliates or other investors

Historically management may have a track record of successfully planning and executing on similar plans, such as a refinancing, restructuring or asset disposal, which in a normal operating environment would support the feasibility of the plan. In the current evolving economic environment, past history may not be sufficient to support the feasibility of the plan. If part of the plan is dependent on the performance of parties outside of management’s control, such as when COVID-19 will be contained, and business returns to normal, the ability to access financing or capital markets, the ability to close on a potential asset sale, and the proceeds of such actions are subject to negotiation. As a consequence, alleviating substantial doubt may prove challenging for some companies. The preparation of multiple sensitivity analyses based on a variety of assumptions may be required to appropriately assess the probability of results in multiple market conditions. Management should also ensure that these assumptions are kept consistent with other areas of the financial statements, such as those used for estimates and impairments.

Disclosure requirements

The disclosures required by ASC 205-40 may overlap with those required by other areas within US GAAP. The FASB acknowledged this possibility but concluded that providing guidance in US GAAP about management’s responsibility to evaluate and disclose conditions and events that raise substantial doubt would improve financial reporting for all entities. As a general rule, regardless of whether substantial doubt is alleviated or not, the disclosure is very robust to help the reader understand management’s plans and the key components thereof, along with a general statement that there can be no assurance that management’s plans will be achieved.

Substantial doubt is raised and is not alleviated by management’s plans (substantial doubt exists)
If substantial doubt is raised and is not alleviated by management’s plans, an entity is required to include a statement in the notes to financial statements indicating that there is substantial doubt about the entity’s ability to continue as a going concern. The entity also is required to disclose information that enables users of the financial statements to understand all the following:

  • Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
  • Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  • Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern

Substantial doubt was raised but was alleviated by management’s plans (substantial doubt was alleviated)
If, after management’s plans are considered, substantial doubt about an entity’s ability to continue as a going concern is alleviated, an entity is required to disclose information that enables users of the financial statements to understand all the following:

  • Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
  • Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  • Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern

Ongoing disclosure requirements
An entity must include disclosures related to uncertainty about its ability to continue as a going concern in the notes to the financial statements until the conditions or events giving rise to the uncertainty are resolved. As the conditions or events giving rise to the uncertainty and management’s plans to alleviate them change over time, the disclosures should change to provide users with the most current information, including information about how the uncertainty is resolved.

Internal control over financial reporting

Management needs to evaluate whether it has adequate processes and internal controls in place to comply with the going concern evaluation requirements. Management will likely need to change its current processes and controls or implement new processes and controls to account for the impact, which could vary greatly by industry, as the COVID-19 crisis is a unique and unprecedented event. It may be necessary for management to maintain multiple 12-month rolling cash flow projections reflecting a number of different scenarios.

For example, management will need to evaluate whether it can appropriately identify conditions for its industry (e.g., critical supply shortages, ability to capture critical data remotely, cybersecurity for remote workforce, reduction in demand from significant customers, etc.) and events that raise substantial doubt. The going concern standard requires management to make a reasonable effort to identify these conditions and events. Management will need to determine whether it can do this assessment using its current processes and controls or whether it needs to modify its processes and controls or implement new ones. All significant elements of management’s evaluation of the going concern assessment, including the reviews and approval thereof, should also be subject to the entity’s control environment.

Management’s processes and controls should also address the risk that the going concern assessment could be based on incomplete or inaccurate information about conditions and events that could raise substantial doubt. In the current COVID-19 environment, the going concern evaluation could be a significant undertaking for management and given the rate of change in these factors needs to be updated frequently up to and including the date of issuance if applicable.

Key Takeaways

The ultimate impact of COVID-19 is currently unknown, but it is already having a pervasive impact on the global economy as most market commentators believe we have entered a global recession. This will put more pressure on each entity’s going concern assessment and having a robust process in place to identify and adjust to the evolving COVID-19 landscape will be critical.

Financial Reporting And Accounting Impact on Insurers From Coronavirus Pandemic

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There are many questions that cause anxiety for insurance leaders as they navigate the business implications of the COVID-19 pandemic, including: Will the effects of the pandemic last longer than expected, thereby causing a prolonged spike in life insurance claims? What reimbursement support or relief can the health insurers expect from the federal government for claims related to testing and treatment of the virus? And as people spend more time isolating at home, will a decrease in auto claims frequency be offset by an increase in bad debt expense on premium receivable?

In the face of further uncertainty ahead, there are steps that insurers can take now to mitigate the impacts of COVID-19 on their business. Insurance leaders can look to their CFO and senior financial executives for guidance on critical accounting, financial reporting and operational decisions that can help position the business to sustain through the crisis and thrive in its wake.

Insurers should examine these four key questions to provide some clarity during this uncertain time:
 

1. What impact can insurers expect on asset quality and impairment?

Fixed income securities and mortgage loans make up a majority of insurance company assets.  Current market volatility and a decline in the federal funds rate has caused market value declines on many insurers’ investment portfolios. Here is an analysis on some of the underlying sectors supporting the fixed income asset class.

  • Commercial mortgage loans (CML) and commercial mortgage-backed securities (CMBS): This asset class, which was performing well until recently, has abruptly experienced a sharp decline in value. It could be under duress over the longer term as the economic slowdown caused by the novel coronavirus continues. Take the commercial office space sector, for example. Before the COVID-19 pandemic, occupiers were already experimenting with new workplace designs to foster productivity through shared spaces, which was reducing both their footprint and, in turn, their real estate costs. Now, social distancing requirements due to COVID-19 have changed the long-term market dynamics again as companies realize the benefits of remote working on productivity and costs. Compounding the risk to the real estate sector more broadly, the COVID-19 pandemic has accelerated online shopping purchases, putting additional pressure on many brick and mortar retailers to reduce their store footprint. These underlying trends will have a lasting impact on commercial mortgage loans and mortgage-backed securities held by many insurance companies.
  • Municipal bonds: March saw a significant decline in the S&P Municipal Bond Index, but this recovered quickly as buyers saw bargains in this asset class. According to BlackRock: “Municipals will experience some stress alongside the U.S. economy. Muni issuers must continue to operate despite revenue uncertainty. Some segments will face daunting financial challenges, and federal support may be insufficient. Issuers with solid balance sheets will need to draw down reserves to meet obligations. Safety net hospitals, senior living facilities, mass transit and airports with limited resources will require funding from the states and municipalities they serve. Non-rated stand-alone projects may experience significant credit deterioration.” Overall, this is considered a high-quality asset class which could have some potential downgrades and credit issues along the way if the COVID-19 crisis or the following recession lasts longer than expected. But the overall credit quality in this sector is expected to remain strong.
  • High-quality corporate bonds: These bonds have benefited greatly from recent interventions by the Federal Reserve, such as: cutting the federal funds rate close to zero, opening a lending facility to enhance liquidity in short-term commercial paper markets, and lending directly to corporations and buying investment-grade corporate bonds. In addition, the Treasury restarted its bonds buying program. The Fed is also trying to keep bond markets liquid and functioning smoothly, but the intent is not to rescue the entire corporate bond markets. Issuers with low ratings and certain industries, such as oil and gas, hospitality, entertainment and restaurants, will continue to face downward pressure and may have a difficult time rebounding. This will result in downgrades and credit deterioration over the next several quarters.

These factors will have a direct effect on insurance company investment portfolios, and individual positions with deteriorating asset quality will increase the probability of impairment.
 

2. How is the NAIC providing relief to the insurance industry?

On April 16th, 2020, the National Association of Insurance Commissioners (NAIC) adopted three interpretations in response to policies impacted the COVID-19 outbreak:

  • Interpretation 20-02 provides for a temporary, one-time optional extension of the 90-day rule for uncollected premium balances, bills receivable for premiums and amounts due from agents and policyholders, amounts due from policyholders for high deductible policies, and amounts due from non-government uninsured plans for uncollected uninsured plan receivables. INT 20-02 is available for policies in effect and current prior to the date as of the declaration of a state of emergency by the federal government on March 13, 2020, and policies written or renewed on or after that date. 
  • Interpretation 20-03: Troubled Debt Restructuring Due to COVID-19, was also adopted.This interpretation clarifies that a modification of mortgage loan or bank loan terms in response to COVID-19 shall follow the provisions detailed in the April 7 “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” and the provisions of the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act in determining whether the modification shall be reported as a troubled debt restructuring. 
  • Interpretation 20-04 offers limited-time exceptions to defer assessments of impairment for bank loans, mortgage loans and investments, which predominantly hold underlying mortgage loans, that are affected by forbearance or modifications in response to the COVID-19 pandemic.

These short-term interpretations are designed to provide temporary exceptions for insurers’ March 31st and June 30th financial statements, but the working group will continue to review the situation and will consider whether extensions or additional interpretations are necessary.
 

3. How does the CARES Act benefit insurers?

The CARES Act provides significant tax relief for insurers and other mid- to large-sized companies, because it allows for net operating losses from 2018 through the end 2020 to be carried back for five years prior to the loss. This effectively reverses some provisions from the 2017 Tax Cuts and Jobs Act, which had eliminated carrybacks for net operating losses for certain companies, including life insurers. 

The CARES Act now allows companies to carry net operating losses to before the effective date of the Tax Cuts and Jobs Act, in addition to being able to use the previously applicable tax rate. This has additional benefits for insurance companies that can take advantage of applicable tax credits as a result of the carrybacks. The CARES Act also allows companies to file for accelerated refunds of excess alternative minimum tax (AMT) credits by allowing them to claim the refund in full for 2018 or 2019.

These legislative changes combine to provide relief for insurers that could potentially be facing a surge in new claims because of the pandemic. Other tax savings opportunities for insurers include payroll tax credits and deferrals and tax-deductible charitable contributions. To determine eligibility for tax relief under the CARES Act, insurers should contact their tax professional for further guidance.
 

​4. How can insurers re-establish internal control policies in a remote environment?

During the pandemic, remote working capabilities have been an important component of insurers’ business continuity plans, allowing them to continue operations while also maintaining the safety and productivity of employees. However, work-from-home arrangements may give rise to other risks, potentially compromising the integrity and security of an organization’s sensitive financial and accounting data.
 
For example, many employees working remotely may not have the same cybersecurity safeguards as a secure office space. Employees that use their personal devices for work can also expose an organization to increased cyber vulnerabilities. It’s critical that management work with the IT department to re-evaluate the internal control structure and make any necessary adjustments, including ensuring appropriate data retention and privacy practices, as well as confirming comprehensive cybersecurity practices for remote workers.

It remains unclear what impact the COVID-19 pandemic will have on the future earnings and growth prospects for insurers. That’s why it’s imperative for financial leaders at insurance companies to help guide their organization on the path to profitability. A key component of this is advising about all aspects of the applicable relief offered through government stimulus packages. It’s crucial to take steps now that prepare the organization for sound financial reporting and accounting strategies, which can help minimize potential risks to future operations.

Manufacturing Industry Impacts From The CARES Act

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On Friday, March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act), a $2 trillion stimulus package intended to help mitigate the economic devastation caused by the novel coronavirus (COVID-19).

The stimulus is good news for manufacturers, many of whom are struggling given the current economic circumstances and stand to benefit financially from the package. However, the CARES Act also includes restrictions and responsibilities that manufacturers need to be aware of, especially manufacturers that produce supplies related to the healthcare industry, including ventilators, products like Personal Protective Equipment (PPE) and hand sanitizer, and medication.

We’ve summarized some of the key portions of the CARES Act for manufacturers.
 

Lending Programs The CARES Act is comprised of multiple loan programs targeted at different groups impacted by COVID-19. The programs manufacturers may be eligible for are highlighted in the figure below.

SBA Payment Protection Program – $350B
Under the Small Business Administration (SBA) Paycheck Protection Program, specific funds totaling $350 billion have been set aside for small businesses, to be administered by SBA-approved lenders. Loan amounts for this provision may only be used for rent, insurance premiums, utility payments, mortgages, and payroll.

In order to qualify for a loan under this program, your company must employ 500 workers or fewer (both full-time and part-time), or they must meet the industry size standard set forth by the SBA. The SBA’s size standard for auto manufacturers, for example, is 1,500 employees or fewer.

The maximum amount for these loans is 2.5 times the average total monthly payroll costs for the prior 12 months, or up to $10 million. The interest rate may not exceed 4%. Businesses can also defer payment of the principal, interest and fees for six months to one year.

One of the biggest appeals of the SBA Paycheck Protection Program is that the loans are forgivable, assuming certain conditions are met. The SBA can grant forgiveness up to the total amount borrowers spend of up to eight weeks of payroll costs and mortgage interest, rent, and utility payments between February 15 and June 30, 2020, if the borrower retains its employees and does not reduce salary levels more than 25%. Loan forgiveness is prorated for organizations that do not maintain payroll. The CARES Act provides an exception to the reduction if the eligible entity re-hires employees and/or eliminates the reduction in salaries by June 30, 2020. Forgiven amounts do not need to be reported as taxable income. The Treasury Department is anticipating that not more than 25% of the forgiven amount may be for non-payroll costs.

The application is available through the Treasury Department’s website here. You will need to complete the PPP loan application and include your payroll information. Once complete, submit to an approved lender by June 30, 2020.

Small businesses, nonprofits, and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders starting on April 3, 2020. Independent contractors and self-employed individuals can apply starting April 10, 2020.

SBA Economic Injury Disaster Loans
The SBA’s Economic Injury Disaster Loan (EIDL) program gets an honorable mention here since the CARES Act temporarily expands eligibility to all businesses with 500 employees or fewer. The program offers up to $2 million in economic aid to small businesses, at an interest rate of 4% or less. Loans smaller than $200,000 can now be approved without a personal guarantee. In addition, the CARES Act removes the requirement that borrowers must demonstrate they have not been able to secure credit elsewhere.

Companies can also request an emergency grant cash advance of up to $10,000, to be funded within three days of the SBA’s receipt of the loan application. The grant does not need to be repaid, even if the candidate isn’t ultimately approved for a loan.

Manufacturers can apply for loans under both SBA programs as long as they don’t cover the same expenses.

You can apply directly for an EIDL loan via the SBA’s online portal.

Midsized & Larger Businesses – $500B
The Treasury will have $500 billion at its disposal to give loans to eligible businesses as part of the economic stabilization plan included in the CARES Act. The $500 billion will be allocated as follows:

The terms and conditions of these loans are delineated between the $46 billion for air carriers and businesses deemed critical to national security, and the $454 billion allocated for other businesses, states and municipalities. The former will be provided directly via the Secretary of the Treasury, while the latter will be allocated via programs and facilities established by the Board of Governors of the Federal Reserve program—which means requirements relating to loan collateralization, taxpayer protection and borrower solvency under the Federal Reserve Act also apply. The process to get a loan will also likely be lengthier, as these programs and facilities have not yet been established.

The $454 billion does explicitly include a loan program for midsized businesses—defined as organizations with between 500 and 10,000 employees, for which annualized interest rates cannot exceed 2%. No interest payments are due within the first six months of the loan.

It’s worth noting that the Department of Homeland Security cites “critical manufacturing” as one of 16 critical industry sectors vital to U.S. national security, in addition to the chemical sector and defense industrial base. As a result, many manufacturers may be eligible for the $17 billion allocated for national security businesses.

Unlike the SBA Paycheck Protection Program, these loans are not forgivable. The loans also come with public disclosure requirements, which will be overseen by a Special Inspector General for Pandemic Recovery appointed by the President.

Tax Provisions

The CARES Act also introduces several tax changes, including credits, payment delays and increases to interest deductions that have immediate implications for manufacturers’ total tax liability:

  • Employee Retention Credit for Employers Subject to Closure due to COVID-19 – This tax credit against applicable employment taxes amounts to 50% of “qualified wages with respect to each employee.”
  • Delay of Payment of Employer Payroll Taxes – Employers may delay their 2020 payroll taxes, to be paid in full within two years.
  • Modification for Net Operating Losses – Tax losses from 2018-2020 can be applied retroactively five years to offset income.
  • Modifications of Limitation on Business Interest – Businesses may increase their interest deductions for 2019 and 2020. Previously, the maximum interest deduction was 30% EBITDA. It has been raised to 50% EBITDA. 

Labor Provisions

The most important labor provisions for manufacturers are those regarding paid leave and unemployment insurance. Under the CARES Act, there is a cap on the payments an employer must pay for emergency paid leave. Employers can also elect to receive an advance tax credit on paid leave. If they do not elect to receive the tax credit, they will be reimbursed on the back end.

Unemployment insurance is available to both the unemployed and the underemployed. State short-term compensation programs will make it possible for employers to preserve pro-rated unemployment benefits for employees when reducing their hours.
 

Industry Partnerships

$50 million is reserved for the Hollings Manufacturing Extension Partnership (MEP), for the purposes of helping manufacturers respond to COVID-19. MEP provides resources to small and medium-sized manufacturers.

$10 million is reserved for the National Network of Manufacturing Innovation (also known as “Manufacturing USA”), for the purposes of helping manufacturers respond to COVID-19. They engage over 1,900 member organizations.
 

Medical Device and Biopharmaceutical Manufacturers

There are special provisions of the CARES Act intended for businesses and workers involved in the biopharmaceutical and medical device production industries.

Biopharmaceutical and medical device manufacturers will need to be aware of new rules and regulations set forth by the CARES Act, some of which include:

  • Compliance with the medical supply chain security report. The National Academies of Sciences, Engineering, and Medicine will be carrying out a report on the security of the U.S. medical supply chain, considering issues of national security and the potential for increasing domestic manufacturing of certain medical supplies. As part of the report, the National Academies may consult with medical product manufacturers. Manufacturers should be prepared to comply with the report and watch for its findings once released.
  • Ensure compliance with new manufacturing reporting requirements related to drug shortages. The responsibilities for manufacturers to report on drug shortages has been expanded. For example, manufacturers will now be required to maintain and implement a risk management plan and prepare annual reports for each drug they produce as listed in the Federal Food, Drug, and Cosmetic Act.
  • Notification of discontinuance or interruption of medical device manufacturing. Devices that could have an impact on public health and safety during a public health crisis must be more closely monitored. Manufacturers are now responsible for reporting supply chain disruptions and discontinuations.

Provisions to Increase Supply of Products to Help Fight COVID-19

Certain supplies, specifically hand sanitizer, PPE and cleaning products, are useful in combating the spread of COVID-19. The U.S. is currently suffering from a shortage of many such supplies. The CARES Act includes provisions intended to increase the availability of these products to protect public health.

  • Alcohol – There will be a temporary exception from excise tax for any alcohol that is used to produce hand sanitizer.
  • PPE and Hand Sanitizer – Many of the funds being made available to various institutions, including the Smithsonian Institutes and the TSA, can be used for the purchase of PPE, hand sanitizer, and cleaning products. The demand for these products, while high already, will likely continue to grow as government assistance becomes available for their purchase.

Takeaways

  • Manufacturers should now assess the need for financial relief that is being provided through this $2 trillion CARES Act. There are several very favorable loan options and tax savings strategies that manufacturers of all sizes can benefit from. The underlying theme with these loans and tax benefits is to maintain employee levels so be sure to understand these options before making decisions to reduce headcount.
  • For manufacturers who are able to keep facilities open, either by pivoting production or being classified as essential, employee health and safety must come first. Asking employees to take their temperature multiple times a day, to avoid interacting with other teams and to restrict themselves to their own workspace, and ensuring they know they won’t be penalized for taking time off in light of a potential exposure, are all important steps employers can take to reduce the likelihood of COVID-19 spreading through their facilities.
  • Manufacturers may consider pivoting their production to high-demand items like hand sanitizer or medical devices, which can help alleviate severe shortages of products necessary to fight COVID-19 and keep their operations running. Some manufacturers, such as perfume and alcohol manufacturers, may already have supplies and equipment necessary to produce hand sanitizer. If you are considering pivoting your production, there are several questions you should be asking yourself first. Do you have the necessary expertise to produce the new product, or will you need to hire new workers with specialized knowledge? Are you aware of any new restrictions and/or regulations that you’d be subject to if you produce this new product? Do you have access to the resources necessary to produce this product?
  • Biopharmaceutical manufacturers should increase visibility in their supply chains to comply with new supply chain regulations in the CARES Act. Does your supply chain have blind spots? If so, several technological tools are available to help. Smart logistics, Cloud-based GPS, and Radio Frequency Identification technologies (RFID) are just a few tools that manufacturers can use to shed light on the hidden parts of the supply chain, hopefully reducing the likelihood of unwelcome surprises.