Accounting for PPP Loans

Accounting for PPP Loans

Congratulations!  Your not-for-profit organization (NFP) has been approved for Paycheck Protection Program (PPP) funding.  Now what?

How does an NFP record the proceeds of Paycheck Protection Program (PPP) funding?

First and foremost, PPP funding is a loan.  As such, the initial transaction is recorded as a debit to cash for the full amount of the proceeds and a credit to a liability account.

Should interest expense be recognized on a PPP loan?

Yes.  Interest expense should be recognized periodically at the stated rate of 1% by a debit to interest expense and a credit to interest payable.

Since this is a below-market interest rate, should interest be imputed?

No.  While Accounting Standards Codification (ASC) 835-30, Interest – Imputation of Interest, generally requires interest to be imputed on below-market debt, transactions where interest rates are affected by tax attributes or legal restrictions prescribed by a government agency, such as the Small Business Administration (SBA), are excluded from this requirement. 

How is a PPP loan reflected in the NFP’s financial statements?

ASC 470, Debt, provides guidance on presentation and disclosures pertaining to debt.  The principal balance of a PPP loan and accrued interest are reflected as liabilities – apportioned between current and non-current in a classified balance sheet.  Significant terms such as interest rate and maturity date should be disclosed along with aggregate amounts of maturities due each year for the following 5 years.  The potential and general conditions for forgiveness also should be disclosed.

How does an organization obtain PPP loan forgiveness once the funds are spent?

The CARES Act provides guidelines for loan forgiveness:

  • Borrowers apply to the lender, not the SBA, for loan forgiveness.
  • Applications must be supported by appropriate documents and by statements certifying that the documents are true and that the documented expenditures were used to retain employees and/or to make eligible mortgage interest, rent, and utility payments. 
  • Lenders will issue decisions about forgiveness within 60 days of application.

Further guidelines and additional requirements likely will be defined by your lender or may be the subject of additional SBA guidance in the coming weeks.

When and how should an NFP recognize loan forgiveness?

Accounting guidance for loan forgiveness by NFPs is provided in ASC 958-605, Not-for-Profit Entities – Revenue Recognition – Contributions.  Under ASC 958-605, a promise to reduce, settle, or cancel liabilities is recognized as contribution revenue when the promise is unconditional.  Requirements to incur qualifying expenditures within a specified time frame, make and support application, and receive lender approval represent conditions to be satisfied before reduction or cancellation of the debt is recognized.

Until forgiven, a conditional contribution for PPP loan forgiveness should be disclosed in the financial statements.  When the conditions are met, and the loan is forgiven, an NFP should recognize contribution revenue for the amount of PPP loan principal and interest that is forgiven and reduce the related liabilities.  Presentation of contribution revenue in the financial statements within an intermediate measure of operations or as non-operating might vary.  NFPs that have industry-defined intermediate measures, like Health Care entities, will need to consider that guidance in determining the proper presentation.

If a PPP loan is forgiven after year-end but before the financial statements are issued, can the forgiveness be recognized as of year-end?

No.   Forgiveness is conditional, and the loan principal and interest remain outstanding liabilities until the conditions are met.  If conditions are met after year-end but before the financial statements are issued, a non-recognized subsequent event has occurred and would be disclosed in the financial statements.  It may be appropriate to modify classification of subsequently forgiven debt in a classified balance sheet and adjust aggregate maturities of debt to reflect the impact of the subsequent forgiveness.

If an NFP incurs qualified expenditures before year-end for PPP loans that are later forgiven, can loan forgiveness be recognized to “match” the expenditures as of year-end?

No.  As discussed above, recognition of forgiveness is not appropriate until all conditions have been met.