There are two primary areas that I think need to be further evaluated before following the CPEA report’s recommendation:
With the introduction of the CARES Act, our firm created a library of resources, mostly focused on the Paycheck Protection Program (PPP), to help entities, including nonprofit organizations, navigate the post-pandemic environment. However, lacking within the sea of resources is authoritative guidance on how nonprofit organizations should account for the PPP funds they receive. This is due to the unique nature of the transaction. The details are included on the Payroll Protection Program page of the SBA website.
This funding represents a loan, with the potential to be forgiven based on the payment or incurrence of eligible costs during a defined “covered period,” with otherwise eligible costs deemed to be not eligible if employees earned in any pay period during 2019 a prorated amount on an annual basis deemed to be in excess of certain limits, subject to potential reduction of amounts forgiven if employee levels are not maintained compared to certain reference points in time, subject to additional reductions of amounts forgiven if salary levels are not maintained compared to certain reference points in time, however, if you hire, or attempt to rehire, employees before a specified deadline, your reduction in forgiveness is not a reduction after all.
As you can see, with the complexity of the transaction, the question of how to properly account for the funds is warranted.
Fortunately, there are a few tools for us to consider in determining the accounting treatment by nonprofit organizations. In what now appears to be an incredibly timely issuance, in -08 to clarify the scope of accounting guidance for contributions received. This update to accounting standards is effective for 2019 calendar reporting years and provides the basis for determining proper accounting.
Additional guidance came from the AICPA on in a special report from its Center from Plain English Accounting (CPEA). The CPEA Report references FASB ASC 958-605 and notes that conditions should be substantially met by the entity before the receipt of assets is recognized as a contribution. Some awards are conditioned on organizations’ incurring certain qualifying expenses (or costs). Those promises become unconditional and are recognized to the extent that the expenses are incurred. ”
While I agree with the CPEA report that this transaction represents a conditional contribution, I think the question of “when is the condition substantially met” may be more complex than outlined in their report.
The AICPA’s CPEA report states a recipient nonprofit organization would recognize contribution revenue, in stages, as it incurs qualifying PPP expenses (including payroll, rent, and utilities), assuming conditions are “substantially met
- Incurring Qualifying Expenses May Not Be an Appropriate Performance Barrier or Condition ASU 2018-08 indicates that qualifying expenses based on specific requirements in compliance with OMB or other restrictive grant documents results in limited discretion on the conduct of an activity and is indicative of a condition. However, PPP was NOT designed to limit how entities conduct their activity, but instead allows different types of entities to continue conducting their general activities as they had, while allowing for a mechanism to measure forgiveness based on the use of funds in broad categories. In addition, factors in determining forgiveness, including maintaining employee counts and salary rates, indicate that the forgiveness is based on metrics other than solely incurring eligible costs.
- Are Other Measurable Performance Barriers a Better Measure of the Condition? ASU 2018-08 indicates a donor-imposed condition is a donor stipulation that represents a barrier that must be overcome before the recipient is entitled to the assets transferred, with failure to overcome the barrier giving the donor a right of return. For a condition to exist, it must be determinable from the agreement when a recipient would be entitled to a transfer of assets. ASU 2018-08 includes the occurrence of a specified event as an indication of a barrier.