PPP Loans: Nonprofit Accounting & Reporting Considerations in Accordance with US GAAP
The Paycheck Protection Program (PPP) has been a savior to many not-for-profit organizations (NFPs), but it has also certainly come with its complexities. Questions regarding loan eligibility, the application process, and calculation of qualifying expenses quickly arose. And then, there is the issue of how to report the PPP loan and its potential forgiveness in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP). This issue is top of mind for many NFPs that received PPP loans. The following summarizes two of the accounting and financial reporting options for the PPP Loan for not-for-profit organizations under the current standards and guidance.
Organizations that Expect to Have Some or All of Their PPP Loan Forgiven
NFPs that intend to seek forgiveness may look to Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 958-605, Not-for-Profit Entities: Revenue Recognition for guidance. Under FASB ASC 958-605-15-5a contributions are defined as “contributions of cash and other assets, including promises to give, or a reduction, settlement, or cancellation of liabilities.” FASB ASC 958-605-55-21 additionally notes, “other promises are conditioned on promisees’ incurring certain qualifying expenses (or costs). Those promises become unconditional and are recognized to the extent that the expenses are incurred.” The forgiveness of the PPP loans is indeed conditional on the NFP meeting certain requirements including incurring eligible expenses, limitations on reductions to compensation and meeting certain full-time equivalent (FTE) headcount requirements. FASB ASC 958-605 indicates that a transfer of assets that is a conditional contribution is accounted for as a refundable advance (liability) until the conditions have been substantially met.
The question is then: when are the conditions for the PPP loan forgiveness substantially met? There is certainly an argument to be made that once an organization has overcome the barriers related to FTE headcount and compensation reductions and has incurred qualified expenses, the conditions for PPP loan forgiveness have been substantially met, and therefore, the contribution should be recognized at that time. The actual submission of the loan forgiveness document may be considered an administrative matter which is not included as a true barrier (condition) to recognition of the contribution.
Under this methodology, one interpretation allows for an NFP to recognize the forgiveness (contribution revenue) in stages for example at the end of a fiscal period for the amount to be forgiven based on substantially meeting the conditions of the forgiveness for that period. The result is that depending on when the conditions are substantially met, an NFP may recognize all or some of the PPP loan as a contribution prior to the time at which the loan is formally forgiven.
Under this treatment, it is not appropriate to net expenses for the amount of PPP loan expected to be forgiven. The NFP would report (contribution) income and related expenses on a gross basis. If an NFP determined there was all, or a portion of the PPP loan for which the conditions had not been substantially met at the end of their reporting period, that portion should be accounted for as a refundable advance liability until the time at which the conditions were met.
Organizations that Expect to Repay Their PPP Loan
For NFPs that expect to repay their PPP loan, the loan should be accounted for in accordance with FASB ASC 470, Debt which requires the loan to be reported as a liability (debt) and for related interest to be accrued and also reported as a liability. FASB ASC 405-20 Liabilities: Extinguishments of Liabilities states the debtor shall derecognize the liability if and only if it has been extinguished through payment or at the time the debtor is legally released as the primary obligor under the liability. In the case of the PPP loan, the extinguishment would be recognized as the loan and related interest was repaid or at the time forgiveness actually occurs. This treatment may be the most appropriate in cases where there are uncertainties about meeting the conditions of forgiveness.
Technical Guidance for Potential Safe Harbor
The American Institute of CPAs (AICPA) on its Recently Issued Technical Questions and Answers webpage addressed questions regarding the accounting for PPP loans and noted the treatment under FASB ASC 470 can be used “regardless” of the situation, effectively sanctioning the model as a safe harbor.
It is important to note that the use of the FASB ASC 470 safe harbor could come with a perceived distortion in financial reporting to some users as a result of a mismatch of timing of expenses incurred and income recognized as the income may be recognized in a later year (when the loan is formally forgiven) than when the qualifying expenses were incurred.
The PPP loan has certainly been helpful to many NFPs but has created some uncertainty for proper accounting and reporting. In any case, management should assess which accounting treatment is most appropriate for the NFP’s unique circumstances and what is most appropriate for reporting to the users of the financial statements.
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