We need to start out with a disclaimer here. Currently, there is no authoritative guidance on how to account for PPP loans. If you google this topic, you’ll find that there is diversity in thought and approaches. However, there is some unofficial guidance from the Center for Plain English Accounting (CPEA), which is the AICPA’s National A&A Resource Center and the information below is based on that unofficial guidance. Also, this article relates to nonprofit organizations only.
Is it a loan or a grant/contribution?
It appears to meet the definition of a conditional contribution. A conditional contribution is recognized as income only when the conditions are met.
How should it initially be recorded?
Since the conditions are not yet met upon receipt of the funds, it should be recorded as a liability and can be named something like “Deferred PPP conditional grant”.
When are the conditions met and revenue recognized?
Here’s where there may be some diversity in thought. Are the conditions met only when the lender approves forgiveness? The CPEA says that they feel the answer to this is “no” and that the conditions are gradually met as the payroll costs (and utilities/rent) are incurred. This means you would recognize revenue each month, in the amount of the eligible costs incurred.
What if we don’t think we’ll have forgiveness?
If the organization does not plan to seek forgiveness or to meet requirements for forgiveness, then the amount should be recorded as a loan from the beginning and imputed interest should be considered since the interest rate is so low. But remember, whether it’s a loan or a conditional contribution where the conditions haven’t been met yet, in either situation it’s a liability. Also, you may determine a portion of the amount is a loan and another portion is a conditional contribution.
What do I call the income on the Statement of Activities?
There is no set rule for this, but it will most likely be important for the users of your financial statements to have a separate account and line item in your income section. You can consider naming it “PPP grant”.
Does this income fall under the new Revenue Recognition guidance?
No, because it’s a contribution.
Note: A few weeks ago, I gave a webinar presentation called “Will COVID-19 Affect (or Infect) Your Audit” where I stated that the PPP loans should be recorded as loans. This was prior to any official guidance. The above is a correction for that statement.
Colette Kamps, CPA