Now that many not-for-profit (NFP) entities have received a loan under the Small Business Administration’s Paycheck Protection Program (PPP), they are now trying to determine how and when to account for the forgiveness of the loan. Although the legal form of the PPP loan is debt, some believe that the loan is a government grant.
Based on non-authoritative technical practice aids and current industry discussions, NFPs have an option to follow either the debt model under ASC 470 or grant model under ASC 958-605. Neither option is considered to be the preferred approach. The NFP is free to determine which option they want to utilize.
Debt Model:
Regardless of whether your NFP entity expects to repay the PPP loan or believes it represents a grant that is expected to be forgiven, you may account for the loan as a financial liability in accordance with FASB ASC 470 and accrue interest in accordance with the interest method under FASB ASC 835-30. Your entity would not incur additional interest at a market rate (even though the stated interest rate may be below market) because transactions where interest rates are prescribed by governmental agencies are excluded from the scope of the FASB ASC 835-30 guidance on imputing interest, for example, government-guaranteed obligations.
Under the debt model, assuming some or all of the loan is forgiven, income would be recognized when your NFP is “legally released,” i.e. debt is forgiven by the SBA.
Grant Model:
If an NFP chooses not to follow the debt model, and it expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents a grant that is expected to be forgiven, it should account for such PPP loans in accordance with FASB ASC 958-605 as a conditional contribution. If conditional, the contribution is not recognized until the conditions are substantially met or explicitly waived. Specifically, an NFP entity would initially record the cash inflow from the PPP loan as a refundable advance. The NFP entity would then reduce the refundable advance and recognize the contribution as the conditions of release have been substantially met or explicitly waived.
How do you know when the conditions of the loan have been substantially met or explicitly waived? At the recent AICPA National NFP Conference, it was suggested that an NFP might want to adopt one of three possible approaches (all non-authoritative):
(1) Recognize contribution income as qualifying expenses are incurred during the covered period, reduced by estimated reductions for headcount (FTEs), and pay reductions. This is a logical and supportable approach under the standards (ASC 958-605-21), but the NFP would have to go through the “substantially met” assessment process and determine if they believe they have substantially met all the conditions of the loan at the statement of financial position date. Given the evolving guidance coming from Congress and the SBA over time, some NFPs might believe that it would be premature to recognize contribution income as expenses are incurred during the covered period, fearing that the amount recognized in one period could subsequently need to be reversed if the final forgiveness calculation resulted in a smaller loan forgiveness amount.
(2) Recognize contribution income once the final forgiveness amount is calculated by the NFP, but before actual forgiveness is received from the SBA. This approach would be a more conservative way to recognize contribution income, and it might be the selected approach if the NFP wants to be very confident that all conditions have been met (level and mix of qualifying expenses, proper calculations of reductions due to FTE count and salary levels, etc. based on most recent guidance) before recognizing the income.
(3) Recognize contribution income once forgiveness is actually received on the loan by the SBA. This represents the most conservative approach for those wanting to be absolutely sure that the SBA has accepted their forgiveness determination. An NFP should understand that this final forgiveness approval by the SBA could be delayed for several months.
It is very important for each organization to understand that it is not acceptable to select approach (2) or (3) above just because they had a good year this past year and want to defer the income to next year. The decision about which approach to select is all about the NFP’s determination of how and when the “substantially met” criteria is fulfilled in their situation.
The NFP should document and provide justification for the approach selected.
Disclosure Under Either Model:
NFPs with material PPP loans should adequately disclose their accounting policy for such loans and the related impact to their financial statements.
If you have questions about your organization’s PPP loan forgiveness calculations and accounting, please contact your local Blue & Co. advisor.
