Mark Koscinski Uncategorized

PPP Loan Forgiveness–Part II

The  Small Business Administration(SBA) has just published its PPP loan forgiveness process. Borrowers are required to submit a package to their lenders documenting use of the funds was done in accordance with the terms of the loans.  The lender will have 60 days to make a good faith determination this was so.  Any deficiencies in the application will need to be corrected before the package is submitted to the SBA. Assuming this is done properly, the SBA will then have 90 days to make a determination of forgiveness.  If rejected, there is an appeals process. The SBA has indicated it will review all loans in excess of $2 million for compliance and possibly for eligibility as well.  

In a previous blog I was critical of the Financial Accounting Standards Board requiring organizations to wait until the SBA formally grants forgiveness of the PPP loans before they could be removed from the borrowers’ balance sheet. Let’s look at this situation. There is a high probability the loan packages will be rejected by either the bank or the lender along the way. Corrections will be made, adding more time to the process. (You have all dealt with banks and regulators before, right?)  Optimistically, this could take a minimum of six months.   The borrower could have satisfied all of the requirements for forgiveness except not  hand-in complete paperwork. This simple action, subject to the whims of bankers and regulators, could determine the date the loan is forgiven and not the economic event of compliance. Since the SBA will not begin accepting applications until August 10, PPP liabilities will be on the balance sheet for six months minimum, clouding  readers’ analysis of the financial statements. Does this make sense to anyone?

Let’s look at some of the practical implications of this. I had complained  NFP organizations with a fiscal year-end of June 30 had no chance of having the debt removed from their balance sheet.  Now, NFP organizations with a fiscal year-end of September 30 will also be carrying the debt on their year-end balance sheets. This will probably be the case for December 31 year end organizations as well. 

In the meantime, bankers will need to give very clear instructions about what they will accept as proof of compliance to speed the process along.  Similarly, NFP management should not make the lenders or the SBA work hard to recommend or grant forgiveness.  Take the time to put together an easy to follow package with sufficient detail. Make the package easy to review.  In short, don’t scrimp on the upfront preparation.  It will only slow the process down.  You want this loan off your balance sheet as fast as you can. 

Mark Koscinski Uncategorized

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.