Over the past several weeks, we have followed closely the discussions in the accounting world pertaining to various accounting methods, all seemingly acceptable, for CARES Act Paycheck Protection Program (PPP) loan program funds. Below, I discuss the methods most likely to be considered by nonprofit organizations.
Background: PPP Loans
As a brief reminder, PPP loan proceeds are to be used to fund payroll costs (including certain covered benefits), rent, utilities and eligible mortgage interest over an eight-week period. The loan can be wholly or partially forgiven, provided that the organization meets certain conditions, including maintaining pre-COVID-19, full-time equivalent headcount and salary and wage levels. The amount forgiven will ultimately be determined by the lending institution’s review of supporting documentation submitted by the organization following the eight-week measurement period. Any amounts not forgiven must be paid back over a two-year period. More information on navigating PPP loan forgiveness can be found here.
Accounting Method 1: Treat it as a Loan
If a nonprofit organization, after applying for and receiving a PPP loan, realizes that it will not meet the criteria for forgiveness and will be required to repay all or significantly all of the amount received, it will most likely need to record the funding as a debt instrument in accordance with ASC 470 and the debt forgiveness provisions found in ASC 405-20-40 (record the receipt as debt, accrue interest, and, if applicable, record debt cancelation as a gain on debt forgiveness when notified by lender of the amount to be forgiven).
Accounting Method 2: Treat it as a Grant
If a nonprofit organization believes that it has incurred, or will incur, qualifying expenses and intends to seek forgiveness, it may choose to account for PPP funding as a conditional contribution (grant) in accordance with ASC 958-605, Not-for-Profit Entities: Revenue Recognition. This standard indicates that the conditions of the contribution/grant should be “substantially met” by the entity before the receipt of assets is recognized as a contribution.
Nonprofit industry experts are divided over whether, for PPP loan purposes, the conditions are substantially met when notified by the lender of the amount “forgiven,” or in stages over time as the qualifying expenses are incurred. Ultimately, the organization, possibly after consultation with an auditor or business advisor, will need to make this “substantially met” decision based on the organization’s unique facts and circumstances.
The steps to account for the PPP funds as a conditional contribution in accordance with ASC 958-605 are summarized below.
- Record PPP proceeds as a liability (either a refundable advance or deferred revenue).
- Record expenses as normal; however, consider using a separate sub-code identifier or other descriptor to allow for easy identification of COVID-related expenses and amounts eligible for PPP forgiveness. Remember, borrowers must maintain appropriate record of all eligible expenses incurred and paid during the eight-week measurement period for submission to lenders as part of the loan forgiveness application. In a recent communication from the SBA, it was announced that “the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate.” To assist with documentation, we have put together a tracking document for borrowers. More information about PPP certification can be found here.
- Following the eight-week measurement period, submit a PPP forgiveness application and required supporting documentation to the lending institution, and within 60 days, the lender will provide notification of the amount to be forgiven.
- If an organization has previously determined that PPP loan program conditions are “substantially met” as qualifying expenses are incurred, the organization would reduce the refundable advance liability and recognize contribution revenue (possibly labeled “PPP grant revenue” on the statement of activities) in an amount equal to qualifying expenses as they are incurred. Alternately, if an organization has previously determined that PPP loan program conditions are “substantially met” when notified by the lender of the amount forgiven, the organization would reduce the refundable advance liability and recognize PPP grant revenue upon notification. Regardless of the method chosen, the revenue is either recorded in net assets with donor restriction and released into net assets without donor restriction, or, if an organization has elected the simultaneous release option for grants, recorded directly into net assets without donor restriction. It’s important to note that, since PPP-related expenses are being recorded as operating expenses, we believe most organizations that present an intermediate operating measure in their statement of activities will record the PPP grant as operating revenue.
- At this point, it is not clear whether interest accrued from the date of loan issuance to the date of loan forgiveness will be eligible for forgiveness under the PPP program. Therefore, if a borrower anticipates this interest amount (accruing at 1% per annum or .08% per month) to be material to the financial statements, the borrower should record this expense and the related accrual.
- Any amount of a borrower’s PPP loan that is not forgiven will remain an obligation that must be repaid and, therefore, should be reclassified to a note payable with interest expense recorded, based on a rate of 1% per annum or .08% per month, from the date the loan was originally issued.
We anticipate that many nonprofit organizations with fiscal year ends of May 31 or June 30 will have a refundable advance/deferred revenue liability reflected on their year-end financial statements due, either to the timing of the loan disbursement or the timing of the lender’s loan forgiveness decision. However, as we anticipate that final PPP expenses and the lender’s loan forgiveness decision will be reached prior to report issuance, a subsequent event note should be included in most organizations’ financial statements, which describes the PPP program and the grant revenue that will be recognized in the subsequent year.
For more information or guidance regarding your nonprofit’s specific situation, please have a member of our team reach out to you.
This article was written on May 18, 2020 and it reflects our views, and the accounting standards in place at the time of the writing, and should be used as reference only. We recommend that you talk to your Warren Averett advisor, or another business advisor, for the most current information or for guidance specific to your organization.