With the beginning of the CARES Act, our firm established a library of aids, mostly concentrated on the Paycheck Protection Program (PPP), to help beings, including nonprofit organizations, steer the post-pandemic setting. However, wanting the sea of resources is authoritarian regarding how nonprofit organizations should account for the PPP accounts they earn. This is due to the unusual nature of the agreement. The details are encompassed on the Payroll Protection Program page of the SBA website.
A summarized part is presented as follows:
This allocation exemplifies a loan, with the likeliness to be let off based on the payment or incurrence of competent costs during a given “covered period,” with otherwise capable costs considered to be not eligible if workers earned in any pay period during 2019 a previously quoted amount on a yearly basis considered to be in abundance of certain thresholds, subject to a probable reduction of amounts pardoned if employee levels are not retained related to certain reference points in time, subject to more deductions of amounts forgiven if income levels are not maintained compared to certain reference points in time, however, if you employ, or endeavor to rehire, employees before a given time limit, your reduction in leniency is not a rebate after all.
With the intricacy of commerce, the question of how to adequately account for the funds is guaranteed.
Luckily, there are limited tools for us to contemplate in inferring the accounting procedure by nonprofit organizations. In what now seems to be an extremely timely allotment, in June 2018, FASB issued ASU 2018-08 to elucidate the breadth of accounting guidance for donations received. This news relating to accounting standards is beneficial for 2019 calendar reporting years and furnishes the rationale for assuming proper accounting.
Extra advice came from the AICPA on May 13, 2020, in an outstanding report from its Center from Plain English Accounting (CPEA). The CPEA Report references FASB ASC 958-605 and remarks that conditions should be majorly met before the receipt of properties is comprehended as a contribution. Some prizes are conditioned on organizations’ incurring certain qualifying expenditures (or costs). Those pledges become unconditional and are recognized to the importance that the expenses are incurred. The AICPA’s CPEA report asserts a recipient nonprofit organization would comprehend contribution earnings in phases, as it incurs qualifying PPP expenses (including payroll, rent, and utilities), inferring circumstances are “substantially met.”
While I agree with the CPEA report that this agreement exemplifies a dependent contribution, I think the question of “when is the condition substantially met” may be further complicated than outlined in their summary. There are two central areas that I think need to be further assessed before pursuing the CPEA report’s recommendation:
Incurring Qualifying Expenses May Not Be an Appropriate Performance Barrier or Condition ASU 2018-08 indicates that qualifying expenses based on certain requirements in obedience with OMB or other restrictive award documents outcomes in limited intention on the code of an activity and is expressive of a condition. However, PPP was NOT constructed to limit how entities conduct their action but instead enables different types of entities to conduct their common activities while enabling a means to assess forgiveness established on the use of funds in wide categories. In extension, factors in deducing forgiveness, encompassing maintaining employee scores and salary rates, indicate that the forgiveness is established on metrics other than exclusively incurring eligible costs.
Are Other Measurable Performance Barriers a Better Measure of the Condition? ASU 2018-08 demonstrates a donor-imposed circumstance is a donor stipulation that exemplifies an obstacle that must be survived before the recipient is authorized to the possession transferred, with disappointment to overcome the obstacle giving the donor a right of return. It must be determinable from the treaty when a recipient would be authorized to transfer properties for a condition to occur. ASU 2018-08 contains the occurrence of a specified event as evidence of a barrier.
The PPP Loan agreements imply that borrowers are eligible for loan forgiveness. However, forgiveness is dependent on requests. Contrary to the prior recommendation, ASU 2018-08 states that a probability examination about whether the recipient is inclined to fulfill the stipulation is not a component when inferring whether a boundary exists. Given the sophistication of the analysis and multiple factors in addition to eligible costs, would the procedure of calculating and correlating for the probable forgiveness be a specified circumstance that implies a measurable performance boundary?
On May 22, 2020, the U.S. Small Business Administration (SBA) mailed a provisional final rule to approve additional criteria for loan forgiveness and bring about the loan forgiveness procedure. The interim final rule explicitly asserts that a borrower shall not earn forgiveness without providing the lender’s required documentation. The interim final rule declares that a lender must hand out a judgment to SBA on loan forgiveness within 60 days of obtaining the finalized loan forgiveness petition. The lending organization proposes payment from the SBA. The SBA has 90 days to send payment to the lending institution. Does the lender’s permission of the forgiveness application affect a measurable performance obstacle for forgiveness? Do SBA’s authorization and funding of the loan, which likely clears the nonprofit from any penalty correlated with the PPP Funding, exemplify a measurable accomplishment barrier?
So the question remains – When is it reasonable for a nonprofit organization to comprehend revenue from a PPP Loan? In contrast to the CPEA report, we do not think the terms of these pacts are compatible with cost compensation grants we regularly see in the exercise where constraints are placed on the conduct of an action by the OMB or other regulatory mechanisms. Also, the validity of other factors, such as employee tally and rate comparisons, expands elements beyond the sheer incurrence of costs.
Authorization of the petition by the lender and SBA, and final funding of SBA’s responsibility, may depict performance obstacles; nonetheless, the nonprofit organization is not an effective party to those processes and, thus, it may not be deemed as a measurable performance obstacle by the nonprofit.
Compliance with the application by a nonprofit organization to the lender may be the most reasonable measurable performance obstacle to contemplate. It is a prerequisite to forgiveness, as demonstrated by the loan agreements, the application itself, and the SBA interim rule from May 22, 2020. It also occurs simultaneously with the nonprofit organization’s quantification of competent forgiveness, a calculation that is more complicated than simply inferring eligible costs. Submission of a report is generally considered an administrative stipulation that is not a performance obstacle if it does not implicate the magnitude to which the recipient is privileged to the offering. However, in this circumstance, the application procedure and calculation that exists side-by-side substantially impact the non-profit organization’s right to loan forgiveness. As a result, we believe the subordination with an application to the nonprofit organization’s lender is the juncture when the conditions are substantially fulfilled. The PPP liability is comprehended as revenue.
The forgiveness process is yet in its initial stages and is still unfolding. There is a potential to be a great assortment in practice with accounting for PPP loans by nonprofit organizations. Piling on to the complexity of the difficulty is that with the expansion of the covered period from 8 weeks to 24 weeks, it is probable that the PPP covered period will stretch several reporting periods for specific fiscal-year nonprofits. We understand that each situation may have unique characteristics to consider, which creates discrepancies with the AICPA’s CPEA report on how a nonprofit organization accounts for PPP Loans. We advise you reach out to your accounting professional to do the same.