- The implications of recognizing PPP dollars in financial statements may affect current year financial performance, next year’s financial performance, debt covenants, and budgeting.
- While there is not universal consensus on what represents a barrier for PPP liability derecognition criteria, consider key factors.
- Read your bond documents and debt agreements to understand the impact of PPP funds on your debt covenants.
Have more questions about PPP funds?
The timing and accounting for Paycheck Protection Program (PPP) loan forgiveness continues to be uncertain. As many senior living providers approach the close of their fiscal year, they need to understand how recognizing these PPP dollars in financial statements may affect current year financial performance, next year’s financial performance, debt covenants, and budgeting. Review relevant questions and guidance to provide clarity as you navigate the treatment of your PPP dollars.
What accounting standards apply to PPP funds?
Generally, two accounting standards apply to nonprofits’ accounting of PPP funds:
- ASC 470, Debt
- ASC 958-605, Revenue Recognition (Not-for-Profit Entities)
What is recommended for nonprofit senior living providers?
Consider ASC 958-605 — the guidance related to contribution and grant accounting — when you determine how to record PPP funds. Under this standard, the PPP funds are initially recognized as a “refundable advance.”
Contribution revenue can be recognized once the conditions of release are substantially met or explicitly waived. Classify any liability booked, such as a refundable advance, as a current or long-term liability based on the anticipated timing of meeting the derecognition criteria. We anticipate these would be classified as current liabilities.
If grant accounting under ASC 958-605 is used, what are the barriers of recognition?
While there is not universal consensus on what represents a barrier for PPP recognition criteria, there are some factors to consider.
|Criteria||Might be a barrier||Might NOT be a barrier|
|Expects full or partial forgiveness||Always a barrier||N/A|
|Paid Eligible Costs (subject to program caps and restrictions)||Always a barrier||N/A|
|Maintained FTEs and wages relative to reference periods and/or met safe harbors||
While we expect this will be considered a barrier, there may be some rationale for recording partial forgiveness based on actual FTEs and wages paid as of a reporting date.
Here are a couple examples:
|Application and review process||
When can I recognize contribution revenue from my PPP funds?
It’s clear that the forgiveness application and review process is a barrier. However, the standard-setting bodies have left this question intentionally open for interpretation. Consider these points:
- Two people might arrive at two different reasonable conclusions due to the lack of consensus related to PPP revenue recognition timing.
- If you recognize income prior to completing the forgiveness application and review process, you will likely be required to provide additional documentation and undergo additional audit procedures. If you wait until you receive legal release, the documentation and review requirements will be minimal.
- If you recognize income before the completion of the forgiveness application and review process, we recommend you gather the following documents, at a minimum, to explain why it is appropriate to recognize revenue:
- Points to address:
- Organization believes it clearly meets eligibility (including economic need) requirements for forgiveness
- Organization’s eligible costs well exceed the amount of forgiveness being requested
- Organization’s FTEs and wage rates well exceed levels needed for forgiveness
- Organization believes it clearly meets any safe harbors being used
- PPP loan agreement
- Draft or actual Form 3508, PPP Loan Forgiveness Application, including supporting documents. If the application has not yet been drafted, provide calculations of the amount of loan forgiveness based on application instructions. Also, document the calculation using the following:
- Payroll reports and reconciliation to the application
- Invoices and reconciliation to the application
- Calculations and support for FTE and wage reduction tests
- Support for any safe harbor elections
- Points to address:
Does the timing of GAAP recognition of PPP funds impact my debt covenants?
It’s important to read your bond documents and debt agreements carefully to understand the impact of PPP funds on your debt covenants. Covenants impacted by PPP loans may not be cured simply because the GAAP financial statements have recognized income. Keep in mind:
- The legal form of the PPP funding is a debt obligation. Therefore, the borrower legally has a loan agreement outstanding until the PPP loan obligation is “legally released” or paid off.
- Derecognition of the liability under GAAP does not necessarily mean the entity has been legally released.
- For example, if the entity has covenants in other debt instruments that restrict debt, acceptance of PPP funds could potentially violate a provider’s covenants — especially if classified as long-term debt. This is true despite an entity calling it a refundable advance and potentially derecognizing it earlier than the legal release.
- Income from PPP loan forgiveness may impact other debt covenants. In many cases, loan forgiveness or other income is excluded from certain financial covenant definitions, but unrestricted contribution revenue is generally allowed in financial covenant definitions.
- Given the information currently available and how the guidance is open to interpretation, questions don’t have bright line answers at this time. Your conclusion may be different, yet reasonable, from others. Consult with your lender or legal/bond counsel for additional clarity.
How we can help
For the latest information on PPP and other provider relief funds, please visit our COVID-19 Resource Center or our Health Care Innovation and Insight (HI2) Blog. If you have additional questions related to the timing and recognition of PPP funds, contact our team for further assistance.