The Paycheck Protection Program (PPP) gave small businesses (including nonprofits) access to $660 billion dollars in federally guaranteed loans. An eligible entity could borrow an amount equal to 250% of its average monthly payroll expenses incurred during the year prior to the loan date with a cap of up to $10 million dollars in loan proceeds. The loans would be due in two years and carry an interest rate of one percent. Payments would be deferred for six months. However, entities would be eligible to apply for full loan forgiveness if the proceeds were spent on allowable expenses. These loans were intended to encourage entities to keep workers on the payroll.
The PPP comes with one very important question. How should an entity, specifically nonprofits, account for such a transaction? There are two accounting standards that are applicable:
- ASC 958-605, Revenue Recognition (Not-For Profit Entities)
- ASC 470, Debt
ASC 985-605 is recommended for nonprofits as the appropriate guidance if forgiveness is expected. The loan would be recognized as government grant revenue when the conditions of forgiveness have been substantially met or official forgiveness of the loan has been received from the Small Business Administration (SBA). The conditions of forgiveness are outlined in the loan documents and the CARES ACT. For reference, the primary conditions of forgiveness are as follows:
- Eligible costs have been paid
- Full Time Equivalent (FTE) headcount requirement has been met
- Application for forgiveness has been completed and submitted to the lender
The most conservative approach is to only record the loan as government grant revenue when official forgiveness has been received from the SBA. In the case that forgiveness was not received before fiscal year end, the loan would be listed on the Statement of Financial Position as “Paycheck Protection Program – Refundable Advance” as a current liability. This would then be picked up on the Statement of Cash Flows as cash flows from operations through a change in the refundable advance liability.
ASC 470 is the recommended guidance if forgiveness is not expected. Under ASC 470, the funds are considered debt. This can impact debt covenants and interest is required to be accrued, although entities would not need to impute additional interest at a market rate, see FASB ASC 835-30-15-3(e) for more information. All these things should be considered before electing this accounting method because once selected, the entity cannot change accounting treatment. Should the loan be forgiven under this method, the funds would be recognized in the Statement of Activities as gain on extinguishment and the proceeds classified as cash from financing activities on the Statement of Cash Flows.
There is a lot to be considered when choosing the appropriate accounting method for the PPP loan funds, and not one situation is exactly like another. Every situation is unique with its own set of factors to consider.