Recognizing PPP Forgiveness Could Impact Budgets

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Nonprofits were undoubtedly happy to be included in the Paycheck Protection Program (PPP), but now comes the process of figuring out how to recognize the funds for budgeting purposes. If all, or even some, of the loan is forgiven, then the amount forgiven becomes income to the organization in the form of a grant resulting from extinguishment of the PPP loan. With nonprofits wanting to show their financial statements in the best light possible, the reporting period in which this income is recognized is critical.

Initially, many accountants expected the PPP loan forgiveness would be recognized as a gain in the statement of activities when the forgiveness is officially approved by the bank. This is typically the point in time when loan forgiveness is recorded.

In a Q&A released by the American Institute of Certified Public Accountants (AICPA) in June 2020, the AICPA stated that nonprofits may instead treat the amount of the PPP loan that is forgiven as a government grant. Under this approach, the loan is recorded as a liability when the funds are received and is recognized as a conditional contribution.

Once the conditions qualifying for forgiveness are satisfied and the nonprofit intends to apply for forgiveness, the entity should recognize the loan funds as grant income in the statement of activities in the amount and over the periods expenses are incurred that will be used for forgiveness. Therefore, the nonprofit should not wait to record the debt forgiveness as grant income until the bank actually approves the forgiveness.

While the implications of this approach are merely a difference in timing, the impacts will be sizable for many nonprofits, especially those with a June 30 fiscal year. Given the timing of PPP funding, most entities expended their PPP funds on qualifying expenses prior to June 30 but will not receive forgiveness approval from the bank until after June 30. Thus, their accounting treatment will impact the amount of grant income recognized in fiscal year 2020 and fiscal year 2021. The bottom line will undoubtedly look much better once the gains are recognized.