Financial Accounting and Reporting Factors for Tribal Businesses During COVID-19

Global efforts to contain the spread of COVID-19 have significantly impacted economies and businesses worldwide including tribal casinos and other tribal business entities.

Although the full implications of the pandemic aren’t yet known, disruption caused by COVID-19 is affecting most business and consumer activities—including major financial market functions, supply chains, production activities, staffing capabilities, facility and store operations, and customers and consumer demand.

For tribal enterprises, the ultimate impact of COVID-19 on financial reporting will vary based on each business’ unique risks and circumstances. However, it’s likely the following accounting and reporting areas will require heightened consideration.

Going Concern Considerations

What’s Going Concern?

A going concern is a business likely to fulfill its financial obligations within the upcoming 12 months of the accounting period. Governmental Accounting Standards Board (GASB) Statement No. 56 states that continuation of a legally separate governmental entity as a going concern is assumed in financial reporting if there isn’t significant information to the contrary.

Information that could significantly contradict the going concern assumption would relate to an entity's inability to continue meeting its obligations, as they become due, without:

  • Substantial disposition of assets outside the ordinary course of business
  • Restructuring of debt
  • Other similar actions

There may be substantial doubt about an entity's ability to continue as a going concern raised by the following indicators:

  • Negative trends
  • Indications of possible financial difficulties
  • Certain other internal and external matters

Impacts of COVID-19

The COVID-19 pandemic has had a substantial impact on tribal businesses in 2020 including:

  • Closures of tribal casinos
  • Decreased consumer demand as a result of stay-at-home orders across the nation
  • Disruption to supply chains for certain businesses

These factors have required management to reevaluate if entities are able to continue as a going concern given the amount of uncertainty surrounding the implications of COVID-19. Going concern considerations can change significantly over time—even short amounts of time—based on the circumstances at play.

For example, the outlook for tribal casinos was more concerning at the end of March 2020, when there was significant uncertainty about the duration of closures and future impacts of the outbreak. As casinos have started to reopen in Spring 2020 to encouraging initial operating results, the outlook is less grim.

However, if state and local re-openings result in an increase in the number of cases, or if there’s a second outbreak in the fall or winter leading to additional stay-at-home orders, there could be another downturn in the economic outlook prior to the end of 2020.

Next Steps

If an entity may not be able to continue as a going concern, it’s important for leadership to:

  • Discuss the situation and potential options with lenders
  • Provide going concern disclosures
Lender Discussions

Going concern discussions don’t necessarily mean an entity is going out of business, but it does imply a change in financial approach is needed. For example, a casino may need to obtain lender concessions in repayment terms or covenant requirements to avoid operating cash shortfalls or instances of debt default. However, even if a lender does agree to change repayment terms, it may still be necessary to provide going concern disclosures.

Going Concern Disclosures

Although auditors will review the going concern analysis, GASB 56 requires management to evaluate whether there’s substantial doubt about an entity’s ability to continue as a going concern for 12 months beyond the financial statement date. In addition, if there’s known information that may raise substantial doubt shortly thereafter, for example within an additional three months, it should also be considered.

Given the effects of the pandemic, entities may need to reassess financial projections and other relevant information used in their going concern evaluation prior to issuance.

If an entity determines there’s substantial doubt about its ability to continue as a going concern, the notes to the financial statements should include:

  • Disclosure of conditions and events giving rise to the assessment of substantial doubt
  • Possible effects of such conditions and events
  • Management’s evaluation of the significance of those events and mitigating factors
  • Possible discontinuance of operations
  • Management’s plans including relevant prospective financial information
  • Information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities

All adverse factors should be considered and disclosed including but not limited to the following:

  • Reduced product demand
  • Facility closures
  • Ability to meet debt covenants or other key financial ratios
  • Any negative cash flows from operating activities
  • Sustained operating losses
  • Working capital deficiencies
  • External matters that might jeopardize the entity’s ability to operate

Asset Impairments

What’s Asset Impairment?

Asset impairment is a significant, unexpected decline in the service utility of a capital asset. The events or circumstantial changes that lead to impairments aren’t considered normal and ordinary.

Whether a capital asset is impaired is determined by a two-step process:

  1. Identifying potential impairments
  2. Testing for impairment

Impacts of COVID-19

The COVID-19 outbreak could result in asset impairments, which will likely require tribal businesses to vigorously evaluate whether the assets are recoverable. For example, if a tribal entity incurred planning and design costs for an expansion project prior to the outbreak of COVID-19, and if the viability of that future expansion is subsequently in question, those planning and design costs should be evaluated for impairment.

Other potential indicators of impairment include:

  • A change in manner or expected use of an asset—such as permanent closure of a tribal business or outlet at a gaming property like a restaurant, buffet, or arcade. For example, if a casino closed its buffet as a result of the pandemic and plans to alter the manner in which the space will be used going forward, the buffet assets may need to be evaluated for impairment.
  • Construction stoppage due to lack of funding, scarcity of resources, or changes in prices. For example, if construction on a hotel was started but stopped due to lack of funding, the asset may need to be evaluated for impairment as of period end—even if the tribe intends to continue the project when funds or resources are available.

Next Steps

If an asset is determined to be impaired, GASB 42 provides guidance on measuring impairment, and GASB 62 provides guidance on classification. Unless the impairment is considered temporary, the loss from impairments should be reported in the statement of revenues, expenses, and changes in net position as one of the following:

  • Operating expense
  • Special item
  • Extraordinary item

The carrying amount of impaired capital assets that are idle at year-end should be disclosed regardless of whether the impairment is considered permanent or temporary. 

Debt Modifications and Loan Covenants

As a result of the COVID-19 outbreak, entities may need to amend the terms of existing debt agreements or restructure those debts.

Some events that may result in noncompliance with certain debt covenants include:

  • Closure of properties
  • Business interruption
  • Emergency distributions

Many tribes have already negotiated debt amendments that waive covenants or extend repayment terms for the near term. However, tribal businesses will need to continue to closely monitor their financial results and be proactive in reaching out to their bankers early to obtain any necessary waivers or amendments.

Additional Disclosures

As year-end and interim reporting deadlines approach, tribal businesses should keep in mind that GASB 56 requires financial statement disclosure of significant violations of finance-related legal or contractual provisions and actions taken to address these violations.

Also, if a tribal business’ previously issued, stand-alone financial statements are incorporated into the financial statements of the tribal government or another tribal entity, the waivers and amendments may need to be updated before those financial statements can be issued.

For example, if a casino issued their financial statements in April 2020—and those statements are subsequently included in the tribe’s general-purpose financial statements—the casino may need to obtain updated waivers or documentation to determine how debt should be accounted for in those statements. The tribe’s auditor may need to review evidence of the updated waivers obtained by the casino before issuing their audit report.

Costs Incurred Due to COVID-19

In response to risks COVID-19 imposes on employees and customers, many tribal entities are incurring additional costs to comply with tribal and federal guidelines that wouldn’t be required in the normal course of business.

These costs may include:

  • Increased cleaning and sanitation requirements
  • Personal protective equipment, including masks, required to be worn by employees and customers
  • Equipment to transition employees to a remote work environment
  • Nonrefundable expenses for canceled events

In addition, many tribal entities have maintained employment for their employees, continuing to incur payroll and employee benefit costs during business closures.

Extraordinary Items or Nonoperating Expenses

GASB 34 and GASB 62 allow governmental entities to record transactions that are both unusual in nature and infrequent in occurrence as extraordinary items within the statement of revenues, expenses, and changes in net position.

Evidence should clearly support classification as an extraordinary item, and the item should be distinguished by its unusual nature and the infrequency of its occurrence, as defined in the following criteria:

  1. Unusual nature. The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the government, taking into account the environment in which the government operates.
  2. Infrequency of occurrence. The underlying event or transaction should be of a type that wouldn’t reasonably be expected to recur in the foreseeable future, taking into account the environment in which the government operates.

Next Steps

Costs incurred as a direct consequence of COVID-19 should be evaluated individually. GASB Technical Bulletin No. 2020-1, issued in June 2020, indicates outflows in response to COVID-19 wouldn’t qualify as extraordinary items. Consequently, absent additional guidance, direct costs related to COVID-19 won’t meet the criteria of extraordinary item classification.

While classification as an extraordinary item isn’t deemed appropriate based on current guidance from the GASB, direct costs related to COVID-19 might still be classified as a nonoperating expense, as those costs may not otherwise relate to the entity’s typical and principal ongoing operations. Standard setters and regulators continue to provide additional guidance on the proper classification of certain COVID-19-related costs, so it’s important to continue monitoring guidance as it’s provided.

We're Here to Help

Given the complexity of the COVID-19 operating environment, the above factors are only a few of the accounting and financial reporting considerations impacting tribal enterprises.

For more information about additional factors and challenges, or to learn more about how COVID-19 may impact your business, contact your Moss Adams professional.

Note on COVID-19

During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: