Dear Clients and Friends,

In December 2019, a strain of coronavirus disease (COVID-19) was first reported.  Since then the impact of COVID-19 has been quickly evolving.  The extent of COVID-19's effect on an Organization's operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult considering the rapidly changing landscape.

Many organizations applied for and received a Payroll Protection Program (PPP) Loan  and are currently trying to determine the portion of that loan that may be forgiven while waiting for final guidance on the forgiveness calculation.  Other organizations received assistance through an Economic Injury Disaster Loan (EIDL).

With June 30, 2020 year-ends quickly approaching, among the many effects of COVID-19, organizations face certain accounting and financial reporting challenges.  This newsletter addresses one of those challenges:  accounting for the PPP and EIDL loans.

If you would like to discuss any of the content provided here or if you have a topic that you would like us to address in a future newsletter, please do not hesitate to contact me, or any member of Kreischer Miller's Not-For-Profit Industry Team. We look forward to hearing from you!

Maxine Romano, CPA, Kreischer Miller

Accounting for PPP and EIDL Loans

Currently, there is no guidance in U.S. GAAP that specifically addresses the accounting for a forgivable loan from a government entity. But, in the absence of guidance, U.S. GAAP suggests that the most applicable guidance should be used. With regard to the PPP and EIDL loans, it appears that FASB ASC Section 470 Debt would be the most appropriate guidance to follow.

While we expect further guidance from our standard-setting bodies the following accounting transactions reflect the current applicable guidance.

When the loan is received:

Debit:   Cash (it is recommended that you segregate these funds in a separate account)
Credit:  PPP/EIDL liability

At June 30, 2020, in most cases, management will not know how much of the PPP loan will be forgiven, and until legally released in writing, the debt must remain on the books at its fair value. We recommend that financial statement note disclosures describe management’s efforts in calculating and submitting the loan forgiveness application, as well as, including what portion of the loan is expected to be forgiven.

Interest expense:

As required with all debt, you must begin to accrue interest on a monthly basis at 1% for the PPP loan and at the fixed rate stated in the EIDL document (maximum rate for this program is 3.75%).

When notice of the forgiven portion of the PPP loan is received:

Debit:  PPP liability for the amount forgiven

Accrued interest associated with the forgiven portion

Credit: Gain on extinguishment of debt (we suspect that this gain will be disclosed as a separate line below operations on the statement of activities; however, we expect to receive additional guidance on the presentation).

The remaining balance of the loan will remain as debt on the statement of financial position. No payments are due on the loan for six months from the date of disbursement of the loan. Interest will continue to accrue during the deferment period.  After the deferment period, the organization will pay the monthly principal and interest payments per the terms of the agreement to satisfy the remaining balance due which is two years from the date of the note. The Organization may prepay 20 percent or less of the unpaid balance at any time without notice or penalties. If the Organization prepays more than 20 percent, they must take action as described in the loan document.

Unlike PPP loans, EIDL loans are not forgivable.  The balance of the EIDL will remain as debt on the statement of financial position.  The EIDL has terms up to a maximum of 30 years based on the financial condition of each borrower. There are no prepayment penalties on an EIDL.

Included under the EIDL program, the CARES ACT also offered an emergency grant up to $10,000 per entity. This grant does not have to be repaid and would be reported as grant revenue (EIDL).

Cash Flow Statement:

For the year ending June 30, 2020, under current guidance, the proceeds of both the PPP and EIDL loans should be classified as financing inflow, and payments toward these loans would be classified as financing outflow. The portion of the PPP that is forgiven would be disclosed as a non-cash activity.

As indicated above, there is no guidance in U.S. GAAP that specifically addresses the accounting for forgivable loans from a government entity.  We are anticipating further discussions and guidance from our standard-setting bodies, along with disclosures that should be included in the notes to the June 30, 2020 financial statements. We will update this information as soon as we receive additional guidance.

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Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.