Many not-for-profit entities and institutions of higher education have received loans under the Paycheck Protection Program (PPP). Now, organizations are tasked with determining how to account for these loans.
Here, we outline the guidance that’s been provided so far for not-for-profit entities—to help organizations understand the PPP loan accounting options available and figure out which one applies to their specific situation.
To assist entities in accounting for forgivable loans received under the PPP, the American Institute of Certified Public Accountants (AICPA) issued Technical Question and Answer (TQA) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program, on June 10, 2020.
Given the unique nature of the PPP, questions have arisen about how a borrower should account for the loan in accordance with US Generally Accepted Accounting Principles (GAAP).
TQA 3200.18 provides nonauthoritative guidance on how nongovernmental entities, including business entities and not-for-profit entities, should account for a forgivable loan received under the PPP.
While the guidance is nonauthoratitive, it reflects the conclusions of the AICPA staff who consulted with the SEC and Financial Accounting Standards Board (FASB) staff, as well as various expert panels, to develop it.
As indicated in the TQA, not-for-profit entities can account for a PPP loan as debt under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 470, Debt, or as a conditional contribution under ASC 958-605, Revenue Recognition, provided certain conditions are met.
Regardless of whether a not-for-profit entity expects to repay the PPP loan, or believes it represents an in-substance grant, the loan may be accounted for as a financial liability in accordance with ASC 470, Debt, with interest accrued in accordance with the interest method under ASC 835-30, Imputation of Interest.
Following the guidance in ASC 470, a borrower would recognize the entire loan amount as a liability on the balance sheet with interest accrued and expensed over the term of the loan. The entity wouldn’t impute additional interest at a market rate because transactions with interest rates prescribed by governmental agencies are excluded from the scope of ASC 835-30.
For purposes of derecognizing the liability, ASC 470 refers to the extinguishment guidance in ASC 405, Liabilities.
Based on that guidance, the loan would remain recorded as a liability until either of the following criteria are met:
- Entity is legally released from being the primary obligor under the liability
- Entity pays off the loan to the lender
A borrower wouldn’t be released legally from being the primary obligor of a PPP loan until forgiveness is granted. As a result, earnings from the extinguishment of the loan would only be recognized once the borrower’s application for forgiveness is approved.
In accordance with ASC 958-605, conditional contributions aren’t recognized until the conditions are substantially met or explicitly waived. In cases where conditions are met over time or in stages, contributions should be recognized as qualifying expenses are incurred.
Under this model, the proceeds from a PPP loan would initially be recognized as a refundable advance—a liability—until the conditions for forgiveness are substantially met. The borrower would subsequently recognize contribution revenue as it incurs qualifying PPP expenses, assuming all other conditions are substantially met.
Not-for-profit entities should disclose their accounting policy for PPP loans and the related impact on financial statements.
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If you’d like assistance determining how to account for a PPP loan your organization has received, please contact your Moss Adams professional.
Note on COVID-19
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