Under the CARES Act, certain nonprofit organizations are granted access to loans through the Payroll Protection Program (PPP). PPP loans can be completely forgiven if spent on qualifying payroll and other costs. PPP loans bear an interest rate of 1.00% and are payable over two years. In this blog, we will discuss PPP loan-related accounting implications nonprofit organizations should consider.
Below-Market Interest Rates
As discussed in a previous blog, nonprofit organizations commonly receive below-market or interest-free loans. Although a 1.00% interest rate is likely below any market interest rate available to a nonprofit organization, accounting standards specifically prescribe an exception for the need to calculate a discount or imputed interest on government-guaranteed obligations, such as PPP loans (FASB 835-30-55-3(e)). Accordingly, a nonprofit organization would not need to impute interest on a PPP loan it receives. Any interest payable on the loan should be expensed as incurred.
Nonprofit organizations sometimes receive external guarantees on their loans to obtain lower interest rates. Such arrangements could normally be recognized as a contribution to reflect the value of a lower interest rate on similar loans the nonprofit could otherwise not obtain without a guarantor (FASB 460-10-55-15). All PPP loans, whether issued to for-profit or nonprofit organizations, are guaranteed by the U.S government. Because all PPP loans bear a 1.00% interest rate, and there is no comparable market to obtain similar loans, the value of the guarantee should not be recognized as a contribution.
Forgiveness of PPP Loans
The accounting standards codification definition of a contribution includes any cancellation of the nonprofit organization’s liabilities. Accordingly, any amount of a PPP loan that is forgiven should be recognized as unrestricted contribution revenue.
It should be noted there is no “conditional” element to this contribution; it is completely unconditional. Forgiveness of the loan, once it occurs, is not contingent on the nonprofit meeting any barriers going forward.