As many nonprofit organizations have received PPP loan funds and will be requesting loan forgiveness, we wanted to share a couple of articles with our clients that discuss the accounting for these funds. The key takeaway is that a nonprofit organization will have a couple of options, as stated below, and will need to determine what works best for them.
- Accounting for the loan as debt under FASB ASC 470, Debt, where the liability would remain on the statement of financial position until the loan forgiveness application is officially approved. Once approved, the debt would be derecognized and contribution income would be recorded.
Note that under this option, it could take over a year before the debt is removed from the books, so an organization would want to consider how this might impact their debt covenants, etc.
- (The option most nonprofits will likely choose, should they expect the debt to be forgiven) FASB ASC 958-605, Not-for-Profit Entities: Revenue Recognition. Under the ASC 958-605 Conditional Contribution model, the loan funds would be recorded as a ‘refundable advance’ (liability) until such time the related conditions are substantially met. Once this occurs, the organization would reduce the refundable advance and recognize the forgiveness income. Substantially meeting the conditions can occur in stages.
What is a ‘condition’ and what does ‘substantially met’ really mean?
FASB defines a donor-imposed condition as ‘a donor stipulation that represents a barrier that must be overcome before the recipient is entitled to the assets transferred or promised. Failure to overcome the barrier gives the contributor a right of return of the assets it has transferred or gives the promisor a right of release from its obligation to transfer its assets’.
Essentially, the organization cannot derecognize the liability (and recognize the income) until the imposed barriers have been overcome (i.e. headcount requirements, qualified expenses, etc.).
Note that the income cannot be recognized based on if it’s ‘likely’ or ‘probable’ that the condition(s) will be met, rather, all conditions must be met/satisfied before income can be recognized.
Regardless of which accounting option is elected, it is crucial that good accounting records are maintained for internal and external audit and tax purposes. For example, during your annual audit or review, support for the calculation and related amount of forgiveness income that was recognized will be requested.
Note the attached articles also include discussion on recent changes, including increased covered period from 8 – 24 weeks, reducing from 75% to 60% the percent of a borrower’s loan proceeds which must be used for payroll costs, increase from two years to five years the maturity of loans issued on or after June 5, 2020, etc.
We realize this is a high level summary, but we hope you’ll find the attached articles informative and a good starting point for internal discussions on electing the best accounting alternative.
Author: Susan Nobles, CPA, Audit Director
This material includes content originally developed by the Center for Plain English Accounting and used by license with the AICPA. ©2020, AICPA. All rights reserved. No further use permitted without express written permission of the AICPA.