When accounting for Paycheck Protection Program (PPP) loans, for-profit entities may wish to apply the conditional contribution method that has been more commonly associated with not-for-profits’ PPP accounting.
According to AICPA Technical Question and Answer guidance, when the PPP’s eligibility and loan forgiveness criteria are expected to be met, a for-profit could account for a PPP loan in accordance with FASB Accounting Standards Codification (ASC) Subtopic 958-605 as a conditional contribution.
Although the scope of ASC Subtopic 958-605 excludes governmental contributions to for-profits, FASB’s staff has acknowledged that entities scoped out of that guidance are not precluded from applying it by analogy when appropriate.
The issue of business entities analogizing to the guidance in ASC Subtopic 958-605 was discussed by FASB’s staff at the Private Company Council meeting on April 17, 2020, as well as by the FASB Not-for-Profit Advisory Committee during its meetings on Sept. 13–14, 2018, and April 27, 2020.
Revenue can be recognized under this model when:
- There is at least one barrier to entitlement that must be overcome; and
- There is a right of return to the provider if the grant or contract provisions are not met.
What is a barrier?
But in the case of PPP loans, what is a barrier? This is proving to be a difficult question.
Barriers are requirements that are measurable and performance-related, and they should be related to the purpose of the agreement. With PPP loans, multiple barriers may need to be overcome. They may include:
- Meeting required limits for qualifying expenses, such as payroll, rent, or utilities incurred during the covered period.
- Metrics or milestones such as employee retention to be achieved over time or at a point in time.
- The submission of an application for forgiveness to a bank, or bank approval of the forgiveness application and submission to the U.S. Small Business Administration (SBA).
- Approval of forgiveness by the SBA, or the providing of documentation of forgiveness by the SBA or the bank.
GAAP is clear that applying a probability assessment is not acceptable when determining whether a stipulation or barrier has been met. Barriers must be substantially met or explicitly waived before revenue is recognized. For example, in considering a minimum payroll expense barrier, it is not permitted to conclude that because payroll expenses usually exceed the required amount, the barrier has been met. Expenses must actually be incurred before the barrier is deemed to have been met.
Another consideration is whether partial recognition may be appropriate. Pro rata recognition could be permitted if the agreement allows barriers to be met over time when incurring expenses that qualify for forgiveness.
CPAs may also need to consider whether the amount of the loan or the availability of safe-harbor rules affect whether a stipulation qualifies as a barrier.
The most challenging part of applying this guidance is deciding which requirements of the PPP agreement are considered to be barriers within the context of the accounting standards. The only thing that accounting professionals agree on is that there is a diversity of opinions about which PPP requirements qualify as barriers.
It would be great if there were an easy answer that fit all these situations, but there isn’t. And in some cases different conclusions could be reasonably supported. This is an area where CPAs will have to use judgment. Paragraphs 5C–5F of ASC Section 958-605-25 provide guidance to consider in making these judgments.
As always, these decisions should be documented, especially when determining that revenue can be recognized before formal forgiveness has been granted by the SBA and the bank. The bank will retain the loan receivable on its books until notified of formal forgiveness by the SBA. This could result in a difference between the entity’s books and bank records, which could need to be explained.
Disclosures are less complicated
Disclosures under the conditional contribution model are more straightforward. There are no specific disclosure requirements for PPP loans that would differ from any other liability or debt instrument.
But ASC Paragraph 958-310-50-4 does require providing a “pipeline” disclosure for conditional promises to give. Recipients should provide the total amount of the PPP loan and a description of the loan’s characteristics.
For example, it would be appropriate to disclose general information about the PPP agreement, including the amount borrowed, the interest rate, repayment provisions, the maturity date, the amount outstanding at year end, and when the not-for-profit intends for the loan to be forgiven.
Recipients also should remember to include the accounting policy disclosures required by ASC Paragraph 235-10-50-3. This means describing accounting policies and methods that involve a selection from existing acceptable alternatives; industry peculiarities; or unusual or innovative applications of GAAP.
Related to PPP loans, this may mean describing why the conditional contribution method was chosen and the judgments related to barriers.
Ultimately, this is a case of careful consideration of the loan agreement, the intentions of the entity regarding forgiveness, how the terms have been or will be met, and a reasonable application of the accounting standards.
There may not be one right answer, which is something that CPAs often struggle with, but with solid documentation of the thought process and the conclusions reached, entities should find themselves on solid ground.
For more information on this topic, watch this video on the AICPA & CIMA website.
— Christopher Cole, CPA/CFF, CGMA, is an associate director of the Association of International Certified Professional Accountants and senior technical manager for not-for-profit content development for the AICPA, as well as the staff liaison to the AICPA Not-for-Profit Entities Expert Panel. Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.