The Treasury released a list of organizations that received more than $150,000 in Paycheck Protection Program (PPP) loan funds, of which over 4,500 were nonprofit organizations in California and 1,500 were nonprofit organizations in Los Angeles and Orange County. While many of the loan funds were generally received in March and April, use of funds may take place over the following 8 to 24 weeks. However, the official approval of the forgiveness by the bank may not occur until later in 2020. As June 30 represents a common fiscal year-end for many nonprofit organizations, this could result in the receipt, use, and forgiveness of the funds in different fiscal periods. Additionally, for nonprofit organizations with a calendar year-end, June 30 represents the mid-year point where budgets may be reviewed and financial reports may be provided to grantors and the board of directors. Understanding the two models for recognition of forgivable loans received under the PPP presented by the AICPA’s Technical Question and Answer (TQA) 3200.18 is important in order to determine the most appropriate accounting model at June 30, 2020, or at any period-end when the amount of expected PPP loan forgiveness has not yet been granted.
The TQA provides two models under which to recognize PPP loans:
Debt Model:
- The entity follows the guidance in Financial Accounting Standards Board (FASB) ASC Topic 470 to treat the loan like any other debt.
- The PPP loan is initially recorded as a liability and interest is accrued in accordance with the agreement (not at the market rate). The entity will continue to record the proceeds as a liability until either (1) the loan is partly or wholly forgiven and the entity has been legally released or (2) the entity pays off the loan. At this point, the entity records a gain on extinguishment, in the amount of the forgiveness.
- Benefits: The forgiveness does not need to be estimated at an interim period. The gain is recognized at the time the entity is legally released and there is no risk of gain being erroneously recognized.
- Drawbacks: The expenses that are incurred in the use of the funds are likely to occur in a different period than the gain on the forgiveness of the loan.
Grant Model:
Similar to conditional grant recognition, the entity would treat the PPP loan as a government grant that is expected to be forgiven.
- The entity would initially record the cash inflow from the PPP loan as a refundable advance. The entity would then reduce the refundable advance and recognize the gain as the related eligible costs are incurred (as the conditions are met).
- Benefits: Gain on the forgiveness is recognized as the expenses are incurred. The entity does not have to wait for the loan forgiveness application to be approved by the bank.
- Drawbacks: Management must estimate the expenses that qualify for forgiveness at the reporting period; there is a risk that the gain may be recognized early for expenses that do not qualify.
Additionally, many nonprofit organizations receive grants that support operations, salaries, and program costs. It is important, regardless of the recognition model used, that in determining what expenses qualify for forgiveness, there is no “double-dipping” and expenses charged to grants are not also counted in the forgiveness calculation.
The entity should consider the users of the financial statements and method of recognition that best present their intended use of the funds. Additionally, it is important to disclose the accounting policy used to recognize the loan forgiveness and explain the method to financial statement users.
If you have questions or would like more information, please contact Kelly Buck at kbuck@windes.com or 844.4WINDES (844.494.6337).