COVID 19 loans in the third sector (NPO) - special features
The Third Sector in Switzerland
The third sector is the entire sector of the economy in which associations, federations, foundations, interest groups and other types of non-profit organisations (collectively referred to here as "NPO") are active. The third sector in Switzerland comprises about 13,000 organisations, employs about 7% of the total workforce and provides work for 180,500 full-time employees and for 79,800 full-time equivalents of volunteer work(source/data status 2005).
The total income of the third sector in Switzerland of around CHF 4 billion is financed by 57% from service fees, 35% from state financial contributions and 8% from donations. The sub-sectors of health care, social services, education & research and culture & sport are the most dependent on external services(source/data status 2005).
Although donations and other contributions (legacies, etc.) only account for 8% of the total income of the third sector, they are often at the centre of public interest: according to the 2018 donations statistics of ZEWO (an organisation we are critical of because of its cartel-like character), donations in Switzerland have increased constantly. In 2018, the extrapolated donations from private individuals and companies each amounted to around CHF 1 billion and the contributions from funding foundations to around CHF 2 billion.
In 2018, the fundraising organisations organised under ZEWO (a subclass of all NPOs) received public funds amounting to CHF 1.3 billion in addition to donations and generated CHF 946 million themselves. All in all, they collected CHF 3.4 billion(source).
A major source of income for individual wealthy NPOs is also capital/asset income.
Impact of the COVID 19 pandemic on NPOs
"The COVID-19 pandemic will also have an economic impact on NPOs."
It is to be feared that the COVID 19 pandemic will result in a difficult economic period, where private households in particular, but also companies, will tend to be more frugal. It cannot be ruled out that companies will reduce their sponsorship programmes and private individuals will also donate less. However, the opposite can also be observed in crises: especially NPOs that manage to communicate their need well under the verschäften framework conditions can also record an increase in donations.
As a general assumption, however, the scenario is that in the short/medium term (3-18 months), spontaneous donations in particular will tend to decline and income from fundraising activities will tend to come under pressure. The same can be expected of asset income.
Finally, it can be assumed that certain volunteer work may no longer be so easy to obtain.
The direct or indirect causal economic effects triggered by the COVID-19 pandemic on NPOs are not dissimilar to the effects on businesses of for-profit companies, including
Final loss of income
Deferral of income (deferred grants)
Cash flows in income and obligations diverge (the NPO's projects continue unchanged)
However, it is also important to note that not all NPO income is exposed to the wind of COVID-19: for example, income from service agreements with the community is hardly affected (or at most indirectly/cushioned). This will be discussed below.
COVID 19 loans also for NPOs
Based on the legal foundations, there are no indications why all economic support programmes of the Confederation and the cantons would not be available to NPOs in the same way as they are available to for-profit companies in the context of coping with the COVID 19 pandemic. This applies equally to the COVID 19 credits as well as to the extended support within the framework of short-time work compensation or other measures. The umbrella organisation of charitable foundations in Switzerland, proFonds, also wrote a letter to the FDF and SECO on 25 March 2020.
In our opinion, this also applies in particular to COVID-19 loans (interest-free bridging loans for companies). The Ordinance on the Granting of Credits and Solidarity Guarantees in the Wake of the Coronavirus (COVID-19 Solidarity Guarantee Ordinance SR 951.261; as of 26.03.2020, "COVID-19-SolBüVO") does not contain any provisions that would exclude NPOs. However, in order to comply with the purpose of the COVID-19-SolBüVO, certain special features must be taken into account in the case of NPOs.
Since the basics of COVID 19 credits have already been published, we do not want to go into general basics here, but only into certain topics that are of particular importance for NPOs.
At this point, we would like to point out only two special features that can also be of importance for NPOs:
PostFinance is also entitled to issue COVID-19 credits(Art. 19 COVID-19-SolBüVO).
The COVID-19 loans will not be taken into account as debt capital in the calculations pursuant to Art. 725 para. 1 and 2CO(qualified capital loss and over-indebtedness) until 22 March 2022(Art. 24 COVID-19-SolBüVO).
No COVID 19 loans for NPOs with special sectoral support
No COVID 19 credits can be claimed by NPOs that already receive liquidity-securing support through the special sectoral support programmes of the Confederation in the area of culture and sport(Art. 3 para. 1 lit. d COVID 10-SolBüVO). See details on the sectoral support programmes here:
Requirements for COVID 19 credits at the other NPOs
Subject to the upper size limit (turnover volume of CHF 500 million, Art. 6 para. 2 lit. a COVID-19-SolBüVO), most other NPOs qualify in principle for COVID-19 credits in formal terms, although Art. 3 para. 1 lit. c COVID-10-SolBüVO deserves particular attention. Since the application for a COVID 19 credit is basically subject to the declaration principle, i.e. since the applying organisation has to confirm to the bank on its own responsibility (and under threat of punishment according to Art. 23 COVID 19-SolBüVO) that it fulfils the conditions, special attention must be paid to a reliable documentation regarding the relevant turnover.
NPOs are then eligible for a COVID 19 credit if they can confirm that they have
"are economically significantly impaired due to the COVID 19 pandemic, in particular with regard to their turnover" Art. 3 Para. 1 lit. c COVID 10-SolBüVO.
This provision includes a threefold requirement: there must be (i) significant turnover that is (ii) causally affected by the COVID 19 pandemic (iii) significantly affected:
In our opinion, the relevant turnover must be carefully delimited for NPOs. In accordance with the spirit and purpose of the COVID-19-SolBüVO, only turnover that is actually variable and is to be considered in an analogy to the turnover that profit-oriented companies generate through customer demand may be taken into account. This includes grants and other turnover due to other business activities of the respective NPO.
In our opinion, therefore, revenues generated by an NPO on the basis of performance agreements with a community must be deferred if necessary and may not be taken into account when assessing the maximum amount of the COVID 19 credit (as a rule: 10% of the "revenue [...] in 2019" according to Art. 7 para. 1 COVID 19 SolBüVO).
The same must also apply to capital/asset income, even if this is likely to reduce in the coming months. A certain consumption of capital must be accepted, just as profit-oriented companies will also 'tap' their reserves.
In terms of the self-declaration obligation, the NPO must document that these revenues are actually causally influenced by the COVID 19 pandemic. Although this influence does not have to be immediately/immediately apparent, it must be reasonably apparent and justifiable due to its causality to the COVID 19 pandemic. Purely seasonal fluctuations in the volume of donations therefore do not qualify.
The impairment must be "significant". This normative criterion is not defined and must be assessed by the respective organisation itself.
However, it is not required that an NPO has already used up its own capital or has "empty accounts". Forward-looking, responsible financial management is explicitly expected, which includes maintaining solvency.
Once again, we would like to refer to the penalty provisions(Art. 23 COVID-19-SolBüVO). It has been expressly announced by the FDF that not only will other register data be used for comparison during the review, but that checks will be carried out in the wake of the COVID 19 crisis. In addition, the FR plans to further tighten the penal provisions and in particular to extend them to the competent bodies.
The "FDF [was] instructed to immediately submit to the Federal Council possible options for tightening the penalty and/or liability provisions in the Solidarity Guarantee Ordinance. Inaddition to the companies applying for credit, it should also be possible to prosecute their responsible bodies and thus the natural persons behind them". FAQ COVID19 Bridging assistance from the FDF
Due to the peculiarities of determining the applicable turnover, we recommend that NPOs in particular create careful internal documentation when applying for COVID 19 credits.
Use of funds from the COVID 19 credit
The use of liquid funds on the basis of COVID 19 loans is restricted and subject to conditions in accordance with Art. 6 COVID 19 SolBüVO. In particular, the following must be observed:
"We keep reminding people of the penalty provisions of the ordinance."
The funds based on COVID-19 credits serve exclusively to cover "current liquidity needs of the applicant"(Art. 6 Para. 1 COVID-19-SolBüVO).
The funds may not be used to "make new investments in fixed assets that are not replacement investments"(Art. 6 para. 2 lit. b COVID-19-SolBüVO).
For the duration of a COVID 19 loan, no dividends or royalties may be distributed or capital contributions returned(Art. 6 Para. 3 lit. a COVID 19-SolBüVO). Since NPOs do not regularly distribute profits, this restriction is usually unproblematic for NPOs.
The granting of asset loans or the refinancing of personal and shareholder loans structured as asset loans is excluded, with the exception of the refinancing of account overdrafts accrued since 23 March 2020 with the bank granting the COVID 19 loan(Art. 6 para. 3 lit. b COVID 19 SolBüVO).
The repatriation of group loans is excluded(Art. 6 para. 3 lit. c COVID-19-SolBüVO).
The transfer of COVID 19 credits or the liquidity obtained thereby to a group company directly or indirectly affiliated with the applicant that is not domiciled in Switzerland is prohibited(Art. 6 para. 3 lit. d COVID 19 Solvency Regulation).
Since NPOs have an accounting and financing structure that differs in certain respects from that of for-profit companies, these rules must be interpreted conservatively on a case-by-case basis by each NPO in the light of its own circumstances. In an exemplary manner, the following considerations can be made:
The funds received must be deliberately used to bridge the liquidity bottlenecks that are causally caused by the decline in sales as a result of the COVDI-19 pandemic. The funds may therefore not be used for new projects or the expansion of the business, unless this involves hard contractual obligations and cannot objectively be postponed. Due to the significantly different economic approach and value creation of an NPO compared to profit-oriented companies, special transparency and a sense of responsibility must be applied here.
In the case of NPOs that operate in an international network, it is not possible to transfer the COVID 19 credit funds to any existing general cash pooling, which could potentially also be used to cover COVID 19-related revenue shortfalls of foreign sister organisations.
However, it remains permissible to use the funds to fulfil contractual obligations to projects abroad.
Any financing liabilities (borrowed capital) of group organisations, third parties/private individuals or other banks may not be redeemed with the COVID 19 loans. This does not apply to any financing issued since 23 March 2020 by the bank that is now also issuing the COVID 19 loan (usually the principal bank).
Credit financing of sister or subsidiary organisations in Switzerland remains permissible.
We recommend not only to our clients in the third sector, but especially there, (i) to adopt a concept (appropriate to the size and complexity of the respective NPO) for the application and use of the COVID 19 funds by their supreme body and (ii) to specifically document the actual use of the COVID 19 funds and to use the appropriate accounting instruments according to Swiss GAAP FER 21 for this purpose (see below).
COVID 19 credits and Swiss GAAP FER 21
The special nature of the lack of profit-making and fundraising by NPOs is taken into account by Swiss GAAP FER 21 by supplementing the annual financial statement/consolidated financial statement with a statement of changes in capital and a performance report. For this purpose, there are recommendations that deviate in certain terminology from the accounting regulations according to the Swiss Code of Obligations, which apply to profit-oriented companies.
Without having clarified these considerations in advance with the responsible bodies, we would like to present the following considerations for discussion with reference to accounting:
In the case of an NPO, COVID 19 credits must also be recognised as liabilities. It is appropriate to show them separately as "COVID 19 credit" in the liabilities. Although COVID 19 credits are also subject to a restrictive purpose in use, they must not be reported as restricted funds, as they are clearly debt capital and not organisational capital.
COVID 19 credits are not to be recorded as revenue, they do not replace grants.
In the cash flow statement, the COVID 19 credits are to be shown as proceeds from financing activities. Here, too, it is recommended to show the COVID 19 credits explicitly.
The statement of changes in capital ("CA") shows the balances and changes in the positions of the fund and organisational capital. Since the COVID-19 loans qualify as debt capital, they are consequently not to be listed in the RVK.
However, in our opinion it makes sense and is appropriate to keep a record separate from the RVK in which the inventory, the use and the change of the COVID 19 credit funds are documented in analogy to the RVK. In this way, it can be proven that the COVID 19 credit funds were used for the intended purpose and that the aforementioned restrictions and requirements were observed in their use.
In application of Recommendation 3 Swiss GAAP FER 6, I believe that the application for a COVID 19 credit should also be disclosed in the notes to the annual financial statements, if necessary with a recapitulative overview of its use.
In order to give the governing bodies of an NPO additional security, it could be considered to give the auditing company an additional mandate when auditing the financial statements concerned (as long as the COVID 19 credit liability exists) to additionally check the conformity of the use of the COVID 19 credit funds with the provisions of the COVID 19 SolBüVO.
For further information, please contact Balthasar Wicki.