Not-for-profit organizations faced a particularly difficult time in the wake of the COVID-19 pandemic, with many having to temporarily shutter their doors to help mitigate the spread of the coronavirus disease. Assistance contained in the Coronavirus Aid, Relief, and Economic Security (CARES) Act broadened loan programs for small businesses to include not-for-profit organizations. These loan provisions generally provide some additional financial support to organizations with 500 or fewer employees.
One of the most significant programs coming out of the CARES Act was the Paycheck Protection Program (PPP). The PPP provides that a loan issued to an entity by a financial institution may be fully or partially forgiven based upon meeting the criteria set forth in the program. The financial institution, upon determining the conditions for forgiveness have been met, forgives the loan and is reimbursed by the Small Business Administration (SBA).
Not-for-profit organizations have some clear guidance for how to account for forgivable government loans. Accounting for PPP loans for not-for-profit organizations will fall under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 958, Not-for-Profit Entities. Portions of the PPP loans may also be accounted for under the debt accounting guidance in ASC Topic 470, Debt. The AICPA recently affirmed this guidance for not-for-profit organizations in a technical questions and answers document. The following provides a closer look at that accounting process.
ASC Topic 958 Refresher
The proceeds from the PPP program, which has the government reimburse the financial institution upon forgiveness, should be accounted for under FASB ASC Topic 958-605 (ASC 958) to the extent the recipient not-for-profit organization is both expected and entitled to receive loan forgiveness as a result of meeting the criteria of the program.
Guidance included in ASC 958 requires not-for-profits to evaluate whether consideration received represents an exchange transaction or a contribution. If a transaction is determined to be a contribution, the not-for-profit must further consider if the contribution is conditional or unconditional. A conditional contribution contains a donor stipulation that specifies a future and uncertain event whose occurrence or failure to occur gives the promisor a right of return of the assets it has transferred. The contribution is recognized as income as the conditions are met. It is expected that not-for-profit entities will apply this guidance to PPP loans received to the extent the PPP loans are expected to be forgiven.
For the PPP loans, the consideration received is a nonreciprocal transfer by the financial institution to a not-for-profit entity and is a conditional contribution. The entity should record a liability for the cash received until such time as the conditions of the loan forgiveness are met, at which point the debt forgiveness should be recorded as a contribution. Under the guidance in ASC 958, an entity would include contributions received as revenue.
Any remaining liability (i.e., portion of the PPP loan not expected to be forgiven) should remain as a liability accounted for as debt under ASC Topic 470, Debt (ASC 470).
Currently there is not a clear consensus on the timing of recognition under ASC 958, therefore, not-for-profit organizations should carefully consider their specific facts and circumstances. Entities must evaluate whether they have met the conditions for forgiveness when applying to receive forgiveness from the lender, so it would be reasonable to conclude that because the conditions of the loan forgiveness are met and there is no barrier to entitlement, revenue recognition would be appropriate. Therefore, the occurrence of obtaining lender forgiveness would not have had to occur for the condition of the contribution to be met.
Accounting for Debt
For any portion of the PPP loan that is not expected to be forgiven, not-for-profit organizations should account for the non-forgivable portion of the loan using guidance under ASC 470. These organizations should recognize a liability when the funds are received and accrue for interest at the stated rate in accordance with existing guidance (level yield method). U.S. generally accepted accounting principles (GAAP) includes considerations for imputing interest on loans using a market rate when the stated interest rate may be considered below market. However, transactions where interest rates are affected by legal restrictions prescribed by a government agency are excluded from this guidance, thus not-for-profits should account for interest at the stated rate of the loan. In its Q&A document, the AICPA provided some additional guidance for how not-for-profits could account for gain contingency recognition. The not-for-profit applying this guidance would account for the PPP loan proceeds as a liability and record the cash inflow from the PPP loans as a liability until the loan proceeds are realized or realizable. At that point, the organization would recognize the PPP loan’s earnings impact.
For More Information
For more information about how not-for-profits account for PPP loans, contact us. Visit our COVID-19 Resource Center for more up-to-date information on the pandemic.
Published on June 11, 2020