CONDON O’MEARA MCGINTY & DONNELLY LLP
Certified Public Accountants

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July 2020

Accounting for PPP Loans
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law in March 2020 (see our March 2020 TaxViews) and provided that the Small Business Administration (“SBA”) would administer a Paycheck Protection Program (“PPP”). The PPP is a loan program available to certain businesses, not-for-profit organizations (“NFPs”) and tribal business concerns.  For purposes of this publication, we will limit our discussion of the PPP loan program to NFPs.  On June 5, 2020, the PPP Flexibility Act of 2020 (“Flexibility Act”) was signed into law, and it provides NFPs with greater flexibility and additional time to maximize forgiveness of loans received under the PPP, as enacted under the CARES Act.  
There is no specific guidance in current accounting standards that address the accounting by an NFP that obtains a forgivable loan from a governmental agency.  As PPP loans are received by an NFP, questions have arisen on how these loans should be accounted for.  In June 2020, the American Institute of Certified Public Accountants (“AICPA”) issued Technical Question and Answer 3200.18 Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program to address how a non-governmental entity (including an NFP) should account for a forgivable loan received under the SBA administered PPP.
The AICPA noted that although the legal form of the PPP loan is debt, some believe that the loan, is in substance, a government grant.  The AICPA also noted that Staff of the Office of the Chief Accountant of the SEC have indicated that they would not object to an SEC registrant accounting for a PPP loan:
1.	under Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) Topic 470, Debt, or
2.	as a government grant, provided certain conditions are met.  
While the SEC’s staff members do not set accounting standards, their comments provide insight on the thoughts of a key governmental agency on the accounting for the PPP loans.

Model #1 Liability
Regardless of whether an NFP expects to repay the PPP loan or believes it represents, in substance, a grant that is expected to be forgiven, it may account for the loan as a financial liability and accrue interest.  An NFP would not be required to impute additional interest at a market rate because the interest rate is prescribed by a governmental agency.  Under this model, the proceeds from the loan will remain recorded as a liability until either (1) the loan is, in part or wholly, forgiven and the debtor has been “legally released” or, (2) the debtor pays off the loan to the creditor.  Once the loan is, in part or wholly, forgiven and legal relief is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded.  
Model #2 Conditional Contribution
If an NFP chooses not to record the PPP funds as debt and expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it should account for such PPP loans in accordance with FASB ASC 958-605 as a conditional contribution.
Under this model, the timing of recognition for a contribution received depends on whether the contribution is conditional.  If conditional, the contribution is not recognized until the conditions are substantially met or explicitly waived.  Specifically, an NFP would initially record the cash inflow from the PPP loan as a refundable advance.  The NFP would then reduce the refundable advance and recognize the contribution once the conditions of release have been substantially met or explicitly waived.
An NFP with material PPP loans should disclose their accounting policy for such loans and the related impact to the financial statements.
If you have any questions related to the accounting for the PPP loans, please contact your engagement partner.

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