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Accounting for PPP Loans and Forgiveness by Not-for-Profit Organizations

Many not-for-profit (NFP) organizations have applied for and already received funds under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. While many are still wondering how to obtain forgiveness of the loans, there are also accounting considerations to be addressed.

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Many not-for-profit (NFP) organizations have applied for and already received funds under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. While many are still wondering how to obtain forgiveness of the loans, there are also accounting considerations to be addressed.

Many not-for-profit (NFP) organizations have applied for and already received funds under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  The purpose of these forgivable loans is to help businesses keep their workforce employed during the coronavirus (COVID -19) crisis.  While many are still wondering how to obtain forgiveness of the loans, there are also accounting considerations to be addressed:

  • How should an NFP record the proceeds from PPP?
  • When should the forgiveness be recognized and what will that look like in the financial statements?
  • What about the costs to obtain the loan?
  • Should additional interest be imputed since the loans bear interest at a rate of 1%, which may be below market rates?

Accounting for PPP Proceeds

Recipients of PPP loans should first consider their intent with respect to the loan.  If the NFP intends to repay the loan, it should be accounted for as debt.  Forgiveness will be recorded when the NFP has been legally released from the obligation.

In most cases, we expect recipients to apply for forgiveness of some or all of the loan.  Forgiveness is based generally on a recipient maintaining or quickly rehiring employees, maintaining salary levels and incurring other qualifying expenses including utilities, rent and mortgage interest.  The forgivable portion of the loan should be accounted for as a government grant.  These grants are considered to be conditional contributions in accordance with ASC 958-605.  Conditional contributions should be classified as refundable advances on the statement of financial position and contribution income should be recognized when the conditions have been substantially met.  In the case of PPP loans, conditions are substantially met when an eligible recipient incurs qualifying expenses.

Many organizations have June 30 fiscal year ends.  For any such organizations that received PPP loan proceeds during the spring, some or all of the 8-week forgiveness measurement period may elapse prior to June 30.  Qualifying expenses incurred during this period will result in corresponding contribution income, provided that the organization has determined that it is eligible to participate in the program, even though the application for loan forgiveness will not yet have been processed by the lender.

Interest on the portion of the loan not expected to be forgiven should be accrued at a rate of 1% starting from the date of disbursement.  There is no need to impute interest since the 1% rate is prescribed by the government.

On the cash flow statement, amounts expected to be forgiven should be included in cash flows from operating activities while any amounts not expected to be forgiven should be shown as cash inflows from financing activities.  The amount forgiven should be disclosed as a non-cash activity.

In addition, PPP loan recipients should make relevant disclosures including the amount of the loan originally received, accounting policies with respect to the loan, the amount forgiven during the period, and repayment terms for any unforgiven portion.

Guidance regarding PPP loans continues to evolve.  We will continue to monitor developments including the issuance of any authoritative guidance and will provide updates as warranted.

Please read our article, Accounting for PPP Loans and Forgiveness for private companies for additional information.

PPP Loan Forgiveness Toolkit

Disclaimer:  The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.

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