Certain not-for-profit (NFP) and small business entities are eligible for PPP loans if they have less than 500 employees. Proceeds from the loans are to be used for up to eight weeks of expenses including employee payroll costs, mortgage interest, rent, and utilities.
A portion or all of the loan is forgiven if the borrower maintains pre-COVID19 salary levels and full-time headcount. Loans carry a 1% interest rate (per annum) and must be paid back over two years, with no borrower or prepayment fees. Not more than 25% of the forgiven amount may be for non-payroll costs. Loan payments will be deferred for six months.
In order to have loans forgiven, borrowers provide lenders with documentation of forgivable expenses paid during the eight-week period. Lenders perform an administrative function and report loan forgiveness amounts to the Small Business Administration (SBA). The SBA subsequently purchases the loan from the lender. Cancelled indebtedness results in non-taxable income to the borrower. For nonprofit entities, the forgiven amount is reported as a contribution in the form of a grant.
Clear, authoritative guidance on the accounting for PPP loans for small business entities is lacking as of the writing of this article and may change in light of subsequently issued guidance in this area. Most standard-setters are looking to the U.S. Securities and Exchange Commission to issue guidance on the proper financial reporting for the PPP loan forgiveness, which is expected in late May 2020.
How do I record the PPP Loan as a NFP?
If a NFP intends to seek forgiveness of the PPP loan, it should treat PPP loans as a government grant because generally accepted accounting principles (GAAP) states that contributions received includes: contributions of cash and other assets, including promises to give, or a reduction, settlement, or cancellation of liabilities.[1]
Regarding recognition of the forgiveness of the PPP loans, GAAP notes that conditions should be substantially met by the entity before the receipt of assets (including contributions receivable) is recognized as a contribution[2]. A transfer of assets that is a conditional contribution should be accounted for as a refundable advance (liability) until the conditions have been substantially met or explicitly waived by the donor.
When applying the conditional contribution model in GAAP to treat PPP loans as a government grant, the concept of conditions being “substantially met” includes the conditions specified in the SBA PPP loan program. FASB ASC 958-605-55-70b discusses the concept of qualifying expenses for a cost reimbursement grant.
Nonprofit Example[3]
NFP B is a hospital that has a research program. NFP B receives a $300,000 grant from the federal awarding agency to fund thyroid cancer research. The terms of the grant specify that NFP B must incur certain qualifying expenses (or costs) in compliance with rules and regulations established by the Office of Management and Budget and the federal awarding agency. The grant is paid on a cost-reimbursement basis by NFP B initiating drawdowns of the grant assets. Any unused assets are forfeited, and any unallowed costs that have been drawn down by NFP B are required to be refunded. How do I record the PPP Loan as a business?
NFP B determines that this grant is conditional. The grant agreement limits NFP’s discretion as a result of the specific requirements on how NFP B may spend the assets (incurring certain qualifying expenses in accordance with the Office of Management and Budget rules and regulations). The grant also includes a release from the promisor’s obligation for unused assets. The requirement to spend the assets on qualifying expenses is a barrier to entitlement because the requirement limits NFP B’s discretion about how to use the assets, and the assets would need to be spent on specific items on the basis of the requirements of the agreement (for example, adherence to cost principles) before NFP B is entitled to the assets. This is in contrast to a restriction that typically places limits only on a specific activity that is being funded. NFP B records revenue during the grant period when the barriers have been overcome as it incurs qualifying expenses. The likelihood of incurring qualifying expenses is not a consideration when assessing whether the contribution is deemed conditional.
How do I record the PPP Loan as a business?
US GAAP does not specifically address the accounting by business entities for government assistance and transfers of assets from government to business entities is scoped out of ASC 958-605. Accordingly, the guidance on contributions received does not explicitly apply to PPP loans received by a business entity and GAAP does not have specific guidance on how a business entity would account for a loan that can be forgiven if conditions are satisfied.
In the absence of specific guidance in the FASB ASC, FASB ASC 105-10-15-2, indicates that an entity shall first consider accounting principles for similar transactions or events within a source of authoritative U.S. GAAP for that entity (commonly known as analogizing) and then consider nonauthoritative guidance from other sources.
The business entity scope exception now in GAAP[4] came from FASB Statement No. 116, Accounting for Contributions Received and Contributions Made. During the deliberations on ASU 2018-08, Not-For-Profit Entities (Topic 958): Clarifying The Scope and Accounting Guidance For Contributions Received and Contributions Made, the FASB decided to retain this scope exception.
However, at that time, the FASB also did NOT prohibit business entities from analogizing to the contributions received guidance in FASB ASC 958-605. FASB staff has reiterated this in recent discussions on accounting for PPP loans with Private Company Council during a meeting held on April 17, 2020. Minutes from the meeting state “FASB staff noted that entities scoped out of Update No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, are not precluded from applying the guidance by analogy when appropriate.”
The models that are currently available to account for PPP loans to business entities and considerations in making an accounting policy election for the PPP loan are as follows:
Government Grant Model (U.S. GAAP)
Since the FASB did not prohibit analogies for business entities for contributions received, some business entities may consider the appropriate accounting model for a PPP loan is the government grant model[5]. Business entities that choose to apply this model should have high confidence in their ability to qualify as an eligible recipient and meet the conditions for forgiveness of the loan and, thus, can conclude that conditions regarding qualification, certification, and qualifying expenses, and any other SBA PPP loan program conditions have been “substantially met.”
A business entity applying the government grant model to a PPP loan, as a general matter, would recognize contribution revenue as it incurs qualifying PPP expenses (including payroll, rent, and utilities), assuming conditions are “substantially met.” In these circumstances, the business entity recipient would not be materially different from an NFP recipient and, thus, could justify using the FASB ASC 958-605 government grant model.
A business entity is not required to use the term “contribution revenue” on its income statement. Instead terms such as “PPP loan forgiveness” or “PPP grant” are acceptable with an appropriate disclosure. It would not be appropriate to net the PPP income against expenditures. The revenue from the PPP loan forgiveness should be separated from revenue from contracts with customers covered under FASB ASC 606.
Government Assistance Model (IFRS)
International Financial Reporting Standards (IFRS) provides more robust guidance on government grants for business entities,[6] but is considered nonauthoritative. U.S. GAAP permits considering a nonauthoritative source (including IFRS) when the accounting for the transaction is not specified in U.S. GAAP.[7]
IFRS 20 indicates that “a forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.” IFRS does not define what “reasonable assurance,” but it is commonly interpreted to be “probable” as defined in U.S. GAAP.[8] Therefore, a business entity applying the government grant model should be able to assert it is “probable” it will meet the qualifications and conditions for forgiveness of the PPP loan.
IFRS outlines a capital approach (related to asset acquisition) and an income approach (generally related to expenses). Thus, a PPP loan under IFRS likely would be treated under the income approach as a government grant provided the conditions are met. Under IFRS, a government grant is not recognized in profit or loss until there is reasonable assurance that the entity will comply with the conditions attaching to it, and that the grant will be received.[9] Receipt of a grant does not of itself provide conclusive evidence that the conditions attaching to the grant have been or will be fulfilled.
Government grants shall be recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. IFRS has presentation flexibility regarding amounts recognized in the income statement, indicating that government grants “related to income are presented as part of profit or loss, either separately or under a general heading such as ‘other income;’ alternatively, they are deducted in reporting the related expense.” Thus, in the case of a PPP loan, the entity could choose to present forgiveness as other income or as an offset to payroll expense (or other qualifying expenses).
IFRS also notes that a government grant that becomes repayable shall be treated as a change in estimate.
Key differences between the two approaches:
| U.S. GAAP | IFRS | |
| Recognition when conditions are present | When the conditions have been substantially met. | When there is reasonable assurance that the entity will comply with the conditions and that the grant will be received. |
| Timing and pattern of recognition | When grant is awarded or, if conditional, immediately once the condition is substantially met (can be substantially met in stages). If conditional, no probability assessment. | Using a systematic basis over the periods in which the entity recognizes the related expenses for which the grants are intended to compensate. |
| Presentation of grant income | On a gross basis (grant revenue or other income). | On a gross basis (other income) or on a net basis (offset with related expenses). |
Debt Model (GAAP)
A business entity could select the debt model[10] in GAAP to account for the PPP loan. The business entity would record the PPP loan as a liability upon receipt of the funds and record interest under the interest method similar to any other bank loan or other interest-bearing liability. The debt model is more appropriate for an entity that is not able to establish that it can meet a “no more than remote threshold” for repayment of the PPP loan due to uncertainties about meeting the conditions for forgiveness or eligible expenses. Under GAAP, extinguishment of debt (and related gain or loss on extinguishment) may not take place until the debtor has been legally released as the primary obligor from the creditor.[11] The business entity would make the standard debt disclosures and also consider additional GAAP guidance on recognition and disclosure of loss contingencies.[12]
Summary
Selection of the appropriate accounting policy is a function of management’s intent to seek forgiveness of the PPP loan, ability to meet the conditions of forgiveness, and address uncertainties in the qualifications. SingerLewak is available to provide guidance on the selection of the model that will best suit each company.
[1] Government grants to NFP recipient entities are addressed in FASB ASC 958-605, Not-for-Profit Entities: Revenue Recognition, and specifically in FASB ASC 958-605-15-5.
[2] See FASB ASC 958-605
[3] See Example 14 from FASB ASC 958-605-55-70 E and F
[4] FASB ASC 958-605-15-6d
[5] FASB ASC 958-605
[6] International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance
[7] FASB ASC 105-10-05-2
[8] FASB ASC 450-20-20
[9] IAS 20, paragraph 8
[10] FASB ASC 470
[11] FASB ASC 405-20-40-1b
[12] FASB ASC 450-20