PPP Loan Accounting Guidance for Nonprofits
Paycheck Protection Program (PPP) loans have been a lifeline for many nonprofit organizations during the COVID-19 pandemic. Along with these much-needed funds comes the question of how to account for the loan proceeds and subsequent forgiveness of the loan. Should the loan be treated as debt under FASB ASC 470, Debt, or should it be treated as a government grant under FASB ASC 958-605, Not-for-Profit Entities – Revenue Recognition?
The answer to this question is that it depends on whether the not-for-profit (NFP) entity expects to meet the eligibility and forgiveness criteria for all or substantially all of the PPP loan. If the NFP expects that it will not meet the criteria and will need to repay all or part of the loan, then the loan should be accounted for as debt. However, if the NFP expects to meet the criteria and receive full forgiveness of the PPP loan, it may account for it as either debt or a government grant. Either method is acceptable, but there are distinct differences in the initial accounting for the loan proceeds and the timing of the recognition of income that should be considered when deciding between the two options. Let’s walk through each option to help clarify these differences in accounting.
REPORTING PPP LOANS AS DEBT
Under FASB ASC 470, the loan proceeds are recorded as debt on the Statement of Financial Position and are broken out between the current and long-term portions on a classified statement. Interest is accrued on the loan at the effective interest rate over the term of the loan. However, the NFP should not impute additional interest at a market rate because government-guaranteed obligations, such as PPP loans, are excluded from the scope of the FASB ASC 835-30 guidance on imputing interest.
Under the debt model, the loan remains a liability until either (1) the loan is legally forgiven by the Small Business Administration (SBA) or (2) the NFP pays off the loan. Once the loan is legally forgiven, the liability is reduced by the amount forgiven, and income is recorded as a gain on extinguishment of debt on the Statement of Activities. If forgiveness is received after the date of the financial statements, but before the date, they are issued, it should be disclosed in the notes to the financial statements but not recorded in the financial statements.
The PPP loan proceeds should be shown as a cash inflow from financing activities on the Statement of Cash Flows in accordance with the presentation as debt. Any principal repayments should be shown as cash outflows from financing activities, and interest payments should be shown as cash outflows from operating activities. Any subsequent forgiveness of the loan should be disclosed as a non-cash financing activity.
REPORTING PPP LOANS AS GOVERNMENT GRANTS
If the NFP expects to meet the PPP’s eligibility and forgiveness criteria, then it may alternatively account for the PPP loan as a government grant that is expected to be forgiven using the guidance in FASB ASC 958-605. Under this model, the loan would be treated as a conditional contribution, and the loan proceeds would be recorded as a refundable advance in the current liabilities section on a classified Statement of Financial Position. Interest should not be accrued under this model.
Under the government grant model, the refundable advance is reduced, and contribution or grant income is recognized when the conditions of forgiveness are substantially met or explicitly waived. There are three possible approaches for determining when the income should be recorded:
- Recognize income as qualifying expenses are incurred during the covered period, adjusted by estimated reductions for headcount and pay reductions.
- Recognize income when the final forgiveness amount has been determined but before the forgiveness is received from the SBA.
- Recognize income when the forgiveness is received from the SBA
The third option is the most conservative approach. If the first option is used, there is a chance that the amount recognized in one period would subsequently need to be reversed if the final forgiveness calculation is less than originally recorded. The adjustment would be considered a change in estimate.
The PPP loan proceeds should be shown as a cash inflow from operating activities on the Statement of Cash Flows in accordance with the presentation as a government grant. If the loan forgiveness is recognized in a different period, then the income should be shown as an adjustment to reconcile the change in net assets to net cash provided by operating activities.
The NFP should justify and document the reasons for choosing which option to use. The accounting policy for PPP loan reporting and its related impact on the financial statements should also be disclosed in the notes to the financial statements. As you can see, accounting for PPP loans is not straightforward. The different options may have implications for debt covenants (current vs. long-term liability) and the timing of the recognition of income.
Contact Us
If you would like to discuss these options for recording the PPP loan proceeds and forgiveness to determine the best treatment for your NFP, or if you need assistance with another PPP-related issue, Klatzkin can help. Please click here to contact us. We look forward to speaking with you soon.
©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.