Right now, not-for-profits (NFPs) are considering the role of ASU No. 2018-08 (ASU 2018-08), Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, in the accounting for PPP loans. For example, NFP X received a PPP loan during 2020 and incurred and documented qualifying expenses in conformity with the PPP forgiveness provisions. At its 9/30/20 year-end, NFP X had properly submitted documentation to its lender to request loan forgiveness but had not received a formal response. NFP X fully expects that the entire loan amount will be forgiven. How should NFP X account for the loan at its 9/30/20 year-end?
Since NFP X has planned and fully expects that the entire loan amount will be forgiven, it will likely look to ASU 2018-08 (Note. AICPA Technical Q&A 3200.18 suggested that NFPs could look to either ASU 2018-08 or FASB ASC 470, Debt, for guidance). PPP loans do not involve commensurate value being exchanged nor payment from a third-party payer on behalf of an existing exchange transaction between an NFP and an identified customer. As PPP loans have both a limited discretion barrier (e.g., the NFP must spend funds on compensation/maintain headcount and other qualifying expenses for forgiveness) and a right of return (if the PPP forgiveness criteria are not met, the loan must be repaid) NFP X would have likely deemed the PPP loan to be a conditional contribution upon receipt. The key issue here is whether the formal granting of loan forgiveness is an additional barrier to entitlement (i.e., it is related to the purpose of the agreement) or not a barrier (i.e., it is an administrative task). In this scenario, I personally would lean towards recognizing the PPP funding in revenue in its year-end financial statements since NFP X incurred and documented qualifying expenses during the period allowed (i.e., the limited discretion barrier to entitlement has been overcome). [Note. This is in part based on my thoughts that the formal granting of loan forgiveness appears administrative in nature and that the government’s goal was to make PPP loans forgivable. Other CPAs of goodwill may have a different view.] NFP X would certainly need to include a note disclosure describing the transaction and how NFP X arrived at its conclusion.
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Charlie Blanton, CPA is the Senior Director of Governmental and Nonprofit Content for Surgent CPE, where he authors Surgent’s government and not-for-profit CPE courses and is a frequent webinar instructor.
