As many nonprofit organizations complete their fiscal year, there is much discussion regarding the proper way to record funding received through the Paycheck Protection Program (PPP). There is no set standard guidance for nonprofits, however, there is a consensus throughout the industry on how to record the revenue under Generally Accepted Accounting Principles.
The first determination is regarding management’s intent of forgiveness. If an organization has no intention of applying for forgiveness or it is aware that total forgiveness will not be achieved, the consensus is that a nonprofit should record the PPP Funds as a loan. Due to the extension of the covered period under the Flexibility Act, it is anticipated that this will be rarely seen as it should be easier for organizations to meet the eligible requirements.
Otherwise, the consensus is that the funds are to be accounted for in accordance with ASC 958-605 Revenue Recognition for Grants and Contributions as a Government grant. The original funding upon receipt will be considered conditional (there are barriers AND a right of return, both must be present to be conditional) and should be classified as deferred revenue or a refundable advance (we are recommending “Refundable Advance – Payroll Protection Program”). It is considered conditional because the granting agency has defined a barrier (eligible costs, FTE, etc.). The difficulty is that the FTE determinations were extended by the Flexibility Act until 12/31/20 (see our COVID resource center for additional information regarding FTE and overall forgiveness). As an added point, the actual application for forgiveness and the forgiveness itself is NOT considered a barrier, rather it is considered an item of administration or reporting. As for the consensus regarding FTEs, if the FTEs have not been reduced, the organization would recognize income as qualifying expenses are incurred. If the FTE’s have been reduced, there could be a proportional calculation needed, similar to what is provided for forgiveness.
For financial statement purposes, organizations will need to calculate their earned forgivable portion as of their fiscal year-end. Keep in mind, this could be a difficult task if completed right at year-end and, therefore, could be helpful to perform the calculations after the fiscal-year-end but prior to any audit or release of year-end financial information.
Upon meeting the necessary eligible expenses and requirements of forgiveness, the conditional revenue becomes unconditional and will be recorded as revenue and classified as a governmental grant. At the end of the fiscal-year, organizations may be left with a conditional piece and an unconditional piece of the funding – a deferred revenue and a recorded revenue. Some organizations may run into a situation where factors involved do not allow for a clear decision into whether the funding will be forgiven. As ASC 958-605 states that conditions of the contribution/grant should be “substantially met,” this can provide quite the uncertainty when factoring in the PPP Funds and all of its requirements. Other organizations may find that they are unable to make any determination and, therefore, would consider the possibility of deferring the entire amount.
The revenue as shown on the statement of activities would be considered operational revenue. Since the necessary expenses for the forgiveness are ultimately considered operational type expenses, i.e. payroll, utility, etc. the revenue should be considered operational revenue as well.
For any questions related to nonprofit recording of PPP loan funds, or nonprofit guidance in general, contact VonLehman’s Nonprofit Group leader, Stephanie Allgeyer, at sallgeyer@vlcpa.com or 800.887.0437.
