Accounting for PPP Loan Forgiveness

The Financial Accounting Standards Board (FASB) decided  forgiveness of the Payroll Protection Program (PPP) loans should be accounted for as forgiveness of debt income when the Small Business Administration (SBA) formally absolves the NFP from repayment. This is consistent with previous FASB pronouncements but is somewhat puzzling in this context. The old maxxim consistency is the hobgoblin of small minds is apt. In more normal circumstances, the lender wants repayment when a loan is made  and the borrower normally intends to repay the loan.  This is not how PPP loans are structured.  The lender’s intent  from the very beginning was to forgive the loan if certain conditions were met. These conditions include  using  the borrowed funds to meet payroll and pay other agreed upon expenses. It seems the better matching of income and expense occurs when the NFP uses the funds to make payroll and satisfies the conditions of the program. The  probability of loan repayment becomes remote at that point, triggering the accounting recognition of income then and there. . The final paperwork absolving the debtor from repayment is only a ministerial action by the SBA under this theory, with no impact on the financial accounting.  

Many NFP entities have a June 30 fiscal year-end. Their  financial statements  will reflect a decrease in revenues due to the shutdown from the ongoing pandemic, their ongoing operating expenses  and a liability to the federal government.  In effect, this is a double-whammy.  The operating statement will reflect dismal results due to the loss of revenue and the balance sheet will show  deterioration due to the loan.  This is not where any NFP, depending on public support for its funds, wants to be.  The absurdity continues into the following fiscal year when its financial statements will  show a windfall from the loan forgiveness, distorting yet another year’s operating statement.  The only remedy NFPs will have is disclosing the probability of repayment  and pro-forma results of operations assuming repayment will not be made. This is not a satisfactory “work-around” as many readers do not take the time to read all of the footnotes.  Operating a NFP is tough enough.  Management doesn’t need to be weighed down with pedantically correct rules ignoring the substance of s transaction.