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Wednesday, September 30, 2020

Nonprofit PPP Loan Forgiveness – How to Account for It


There are still ongoing questions about how nonprofit organizations should account for forgivable loans received under the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Additionally, modifications to the PPP loan program have caused an issue many nonprofit organizations are facing with the derecognition of the PPP loan and any potential mismatch (matching principle) with the qualifying expenditures.

On June 5, 2020, the Paycheck Program Flexibility Act (PPPFA) was signed into law. Additional modifications were made on June 22, 2020, when revised interim final rules were also issued. Below is a summary of the primary modifications to the PPP loan program from the SBA website:

  • The percentage of a borrower’s loan proceeds which must be used for payroll costs was reduced from 75% to 60%.
  • Borrowers can elect to use a 24-week covered period or the original 8-week period. (Entities that received funds prior to June 5 may still use the 8-week period.)
  • Provides one safe harbor from loan forgiveness reduction based on reductions on full time equivalents (FTEs) if the entity:
    • Is not able to return to the same level of business activity it was operating at before February 15, 2020, due to compliance with requirements or guidance issued between March 1, 2020, and December 31, 2020, by the Secretary of Health and Human Services (HHS), the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OHSA), related to worker or customer safety requirements related to COVID-19.
    • Files form 3508EZ.
  • Changes from June 30, 2020, to December 31, 2020, (or the date of the forgiveness application, if earlier) the date at which FTE reductions or pay rate reductions can be cured to avoid a reduction to forgiveness.
  • Increases from two to five years the maturity of loans issued on or after June 5, 2020. (Borrowers who received funding before June 5 may also ask their lender to extend their loan period, but this will be at the lender’s discretion.)
  • Extends the deferral period for principle and interest on loans to the date the SBA remits the loan forgiveness amount to the lender or 10 months after the loan forgiveness covered period if the borrower has not applied for forgiveness.

In addition to the changes mentioned above, once forgiveness is applied for, based on the SBA loan review procedures, the lender has 60 days to issue a decision to the SBA, which then has 90 days to review the PPP loan before remitting funds to the lender. Therefore, this increases the length of time from receipt of funds until the final forgiveness amount is approved beyond a year in some cases. Borrowers may also apply for forgiveness using the 3508EZ form, provided they meet one of the three requirements to do so as noted in the instructions to the form.


Accounting Options for PPP Loans

On July 22, 2020, the American Institute of Certified Public Accounts (AICPA) Center for Plain English Accounting (CPEA) released technical questions and answers (TQAs), nonauthoritative guidance that indicates two options that could exist for nonprofits accounting for PPP loans. (Other options are available for for-profit entities, but since there is directly applicable guidance for nonprofit organizations, the CPEA has indicated that these other alternatives are not appropriate for nonprofit use.) These two options for nonprofits are:

  • Treat as debt. This alternative is most appropriate when there is some doubt about whether an organization may qualify for forgiveness. The applicable standard is FASB Accounting Standards Update (ASU) Topic 470. When the nonprofit is legally released as an obligor, it would recognize a gain on debt extinguishment. The CPEA TQAs indicate that a nonprofit entity would be able to utilize FASB ASC 470 if they believe this was an appropriate position based on their policy. This position could impact debt covenants, therefore, nonprofit entities should keep that top of mind. Given the amount of time allowed for the bank and the SBA to evaluate forgiveness (and the possibility that the SBA might end up giving itself more time), the debt could stay on an organization’s books for multiple fiscal years

  • Treat as a conditional grant. The CPEA believes that FASB ASC 958-605, Nonprofit Entities: Revenue Recognition (and specifically the new guidance in ASU 2018-08) provides on-point guidance to nonprofit organizations. Under this model, the nonprofit would recognize the funds as a conditional contribution (refundable advance) until the barriers to forgiveness (incurring the qualifying expenditures) have been met for recognition. It is important to note the CPEA TQAs indicated that nonprofit entities that expect to meet the PPP eligibility criteria, anticipate forgiveness and choose not to follow FASB ASC 470 should follow FASB ASC 958-605.

  • The CPEA TQAs on this provide a nuanced example indicating that the revenue recognized at year-end for an organization still within their covered period would probably not be 100% of the funds expended at that date.

You should continue to refer to the SBA website for information and instructions. You can also find information in Armanino’s COVID-19 Resource Center.

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