August 24, 2020

Accounting for the Impact of COVID-19 on the Restaurant Industry

By Shivanni Narain, Senior Manager, Assurance Services

Food & Beverage

Handshakes, hugs, kisses – and shared meals in our favorite restaurants. These are examples of things that were once part of our daily routine, BC (before COVID). With many regions of the country dealing with mandatory closures, formerly bustling, reservation-driven restaurants are now faced with contactless service and unused space.

The restaurant industry has been profoundly affected by the pandemic. Business models changed overnight, and every key performance measurement was impacted, including benchmarks related to occupancy, payroll costs, and accounting. Following are some of the areas restaurant owners should keep a close eye on:

Occupancy / Leases

Accounting Standards Codification (ASC) 842 provides new guidance on the treatment of leases. The adoption of this new Accounting Standards Update (ASU) has significant balance sheet impacts, particularly for those businesses with leased locations. While analysis and implementation may have been the first hurdles, businesses should update or revise their analysis for any COVID-19 effects.

For example, any lease abatements or rent adjustments received along with any inherent estimates used in the analysis, such as incremental borrowing rates and length of leases, should be reevaluated for possible material adjustments. For businesses that have not yet adopted the standard, consideration of these items will be inevitable.

Paycheck Protection Program (PPP)

Overall, the idea of government assistance through the PPP was beneficial and has helped businesses during these difficult times. While applying for and obtaining the loans entailed one process that was heavily dependent on payroll costs, businesses now have to determine the classification and presentation of the funds received. Will the loans qualify for forgiveness, or will they have to be repaid? The answers to these questions create different accounting impacts.

Companies will also need to revisit and possibly update other items that incorporate these associated areas. For instance, any future projections used for valuations, goodwill analysis, and even financial debt covenants. Even though financial institutions have been more lenient in waiving these financial covenants, noncompliance is an indication of performance or possible future red flags, which could then trigger impairment or going concern discussions.

Financial institutions, investors, and regulatory agencies will probably now be more reliant on the accuracy, completeness, and full disclosure within the financial statements. For independent auditors, a response to the pandemic means additional focus on and attention to critical areas. We have to ensure that our clients also understand these exposures and the importance of reassessing and updating projections, budgets, etc.

While these are certainly unprecedented times, a new normal is emerging. Businesses that embrace the challenge and survive will be successful in their commitment to providing quality service in an environment that is safe for their employees and patrons. It will be interesting to study whether customer loyalty and brand awareness will affect business survival rates and how those factors play into the ability to adjust to the times.