You survived the initial business closures associated with COVID-19 and were lucky enough to obtain Paycheck Protection Program (PPP) and/or Economic Injury Disaster Loan (EIDL) funding.  You may have even muddled through forgiveness applications.  But you still need to figure out how to account for all this in your financial statements!  Just like everything else associated with COVID-19, nothing is simple.

PPP Funding

PPP dollars are considered conditional contributions under generally accepted accounting principles, with the condition being government approval of forgiveness.  As such, cash received is initially recorded as a “refundable advance” liability on the statement of financial position.  Once the Organization is notified that forgiveness is approved, the conditional contribution becomes unconditional.  At this time, the refundable advance can be zeroed out and recognized as restricted revenue.  The restriction relates to the requirement that funds must be spent on payroll, rent, utilities, etc. as specified in the funding documents.  The restriction will be immediately released since it has already been met at the time of forgiveness.  If it becomes certain that a portion of the PPP funding will need to be repaid, the “refundable advance” liability becomes long-term debt, no different than other bank borrowings. 

As the PPP forgiveness process continues to be clarified, the accounting for PPP gets muddier.  The accounting profession has been debating whether formal forgiveness is necessary to recognize PPP revenue.  If your organization has calculated the forgiveness, compiled supporting documentation, and deem formal forgiveness merely an administrative process and not a barrier, you may be able to recognize the revenue in advance of formal forgiveness.

In addition, interest at 1% begins accruing immediately based on the terms of the agreement with the lender.  However, there is debate in the accounting profession as to when/if this liability should be recorded on the financial statements.  In general, the liability should not be significant if you are anticipating qualifying for PPP forgiveness, and you can likely avoid recording the interest until more clarification is received. 

EIDL Funding

EIDL dollars from the Small Business Administration may have arrived in two different forms – an initial advance of up to $10,000, and a formal loan that must be repaid.  EIDL dollars have no restrictions on spending and can be used for any operational costs.  The initial advance is considered an unrestricted contribution and is recorded as revenue at the time it is received.  The loan funds are recorded as long-term debt.  Don’t forget to consider any related accrued interest – this can become significant to some organizations since repayment does not begin immediately.

Consideration of Federal Funds

The Office of Management and Budget has clarified that PPP funding is NOT considered to be federal dollars and is NOT subject to Uniform Guidance audit requirements.  However, any EIDL funding received, whether in the form of loans or grants, is required to be included on your Schedule of Federal Awards.  In some cases, this funding could push total federal expenditures over $750,000 and subject the organization to a compliance audit.  In other cases, these funds could shift the compliance testing to a different federal program than was originally anticipated.

And remember – no double dipping!  If PPP or EIDL dollars are used to cover certain payroll or other costs, those same costs can’t be used in other grant drawdowns.

Audit Disclosures

You can expect additional financial statement disclosures related to the pandemic and any applicable funding the organization received, even if the events happened after the close of the fiscal year.  Be prepared to visit with your auditors about the organization’s ability to continue operations, cash flow and budget projections, investment declines, and the status of any forgiveness application that has been filed.  If business continuity is uncertain, the audit opinion letter may include a going concern disclosure that clearly identifies the challenges you face.

Don’t let accounting for these unique cash flow streams become frustrating. The experts at Ketel Thorstenson, LLP are here to assist you in navigating the accounting details summarized above and are happy to assist you!