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Loan invoice template for non-profit organizations

all right hi everybody welcome to non-profit accounting for ppp loans my name is kyle robbins i am a senior audit manager for larsen and company we are a large local regional firm and we specialize in nonprofit accounting we have several non-profit clients throughout the state of utah we have over 80 non-profits that we work with at any given time so we are specialists in the nonprofit area and we are providing you with this training to help you get a good understanding of how you should be accounting for your ppp loans um this training should be fairly short should be within you know under 15 minutes or so so hopefully it provides you with a good brief explanation but a good solid understanding of how you should be accounting for for ppp loans so let's go ahead and get started on this so i'm going to go through four different things um there's a technical practice aid that has come out specifically for nonprofits that kind of explains how how nonprofits can be accounting for their ppp loans we're going to go through the different models that that technical practice aid provides so there's first is the debt model and then there's the grant model and then finally we'll talk about some of the disclosure requirements that will be applicable depending on which model you follow so we'll get into that as well so first of all the technical practice aid that has come out so in the q a section 3200 it covers this and um i mean the question is for nonprofits it's you know this is a elite the legal form of a ppp loan is debt um it's a debt agreement no payable so the question is should the ppp loan be accounted for as debt and then there's also the question of okay well if it's forgiven is it a you know government contribution should it be counted for as a grant so in this guidance that came out it essentially said hey nonprofits have the option to follow either of these options so there's the asc 470 which is the debt model or they can follow asc 958 605 which is the grant model so we're going to get into those two different models so first of all we will talk about the debt model so a non-profit may elect to account for its ppp loan as debt in ance with fasb470 so how would you go about doing that um first of all you when you receive your cash you record that cash received as a note payable and then you would essentially account for it just as you would your typical debt as you accrue your interest you would need to account for that you need to accrue interest expense um and then your accrued interest expense so one thing to point out though as well is the nonprofit does not need to impute interest so the ppp loan interest rates are are low rates which could be considered lower than the market rate however because the rates are prescribed by a government agency you're excluded from the guidance on imputing interest so you do not do not need to worry about calculating an imputed interest rate and worrying about that so but you do need to accrue the interest based off of the rate that you are receiving in in the note agreement so assuming all or some of the loan is forgiven income would be recognized when the nonprofit is legally released or the debt is officially forgiven um so that's when you've applied for forgiveness you actually get the notification back from the sba or from whatever whatever other entity you may have gotten it from you know if you get if you get it forgiven once you are officially forgiven and receive that notification that is when you would recognize that as revenue um on your income statement or uh statement of activities in the nonprofit case all right so that's the debt model some positive negatives of the debt model um one positive is it's similar to how for-profit entities are accounting for these loans um so you'd be accounting for it similar to a for-profit entity follow a negative is following the debt model you would need to account for recruit interest you would want you would want to accrue your interest and then as it's forgiven um you would recognize that as as revenue as well because the interest is going to be forgiven with the ppp loan um and a negative is is that it does have a later income recognition date than the grant model and we'll kind of get into that as we talk about the grant model so those are just a couple of positive and negatives we thought of there there could be other positives and negatives out there depending on your organization and your specific agreement you have so that covers the debt model so let's get into the grant model so the other option you have to follow so if the nonprofit elects not to follow the debt model but you do expect to meet your forgiveness criteria you should account for it as a conditional contribution and this is in ance with asc 958 605 so that's that's the conditional contribution guidance and essentially you recognize the cash received as a refundable advance so you you debit your cash and you would credit this refundable advance which is a short-term liability so the full amount would be a short-term liability under the debt model that we talked about if you are using the debt model you would technically want to break it out between short term and long term depending on the terms of the loan itself in this case you just in the grant model you would just need to recognize that as a short-term liability and then the contribution revenue would not be recognized until the conditions are substantially met or explicitly waived so this brings on another question of okay well when are the conditions met um and so there's there's some additional guidance that has come out through the aicpa for that so let's talk a little bit about that so there are three different approaches you can take and it's important to make sure you you kind of select which approach you're going to take and have a good good rationale and good reason as to why you're following that approach just to support your decision in which approach you're following so the first approach is you can recognize contribution income as you incur the qualifying expenses however you would want to reduce that contribution income based off of your your estimated reductions for head count and pay reductions so you know if you're you're not expecting to get full forgiveness um if there's like five percent of your loan that probably won't be forgiven then you would want to reduce those expenses um by five percent and recognize that amount as contribution income and reduce your ppp loan liability or your refundable advance in this case by that that same amount so this is an acceptable approach it is the least conservative approach it's more aggressive um and it in my opinion if you do follow this approach you will want to make sure when you're booking the revenue that you do have good support behind the amounts that you're recognizing that you're tracking those expenses and kind of have that support to back the entries you're making to your contribution revenue so the second approach is a little less aggressive a little bit more conservative and that would be you would you could recognize your contribution once the final forgiveness amount is calculated so that could be at the time of when you you calculate your forgiveness amount you fill out your application and you submit that application to the sba or whichever entity you submit that application to and um the rationale behind that is once you have that calculation amount you you're fairly certain that that's the amount you're going to be able to recognize and you at that point you have those expenses um you've incurred those expenses you know the total expenses you've incurred um and so you just have a good good estimate as far as the amount that's going to be forgiven and the likelihood is is fairly high at that point that's the amount that's going to be forgiven so that is the second approach you can follow the third approach is more in line with the debt model in that you would recognize the contribution revenue once you actually receive forgiveness from the sba um so once you get the notification back hey this is it your loan has been forgiven this is the amount that's forgiven at that point you would recognize that amount as contribution revenue and you'd reduce your ppp loan or refundable advance by the amount that was actually forgiven so those are those the three three approaches within the grant model that you can elect to follow some positive and positives and negatives here so i think a positive is that you don't have to accrue interest for your loan it's a refundable advance you just leave that amount as it is once you have been forgiven and you do have part of the loan that you do need to pay off at that point you'd want to start accruing your interest for that however you don't need to worry about it until the forgiven point if you do follow the first approach i think it does add some additional work as far as tracking your expenses and making sure those line up with the contribution revenue you are recognizing so that first approach is when you're recognizing as the expenses are incurred you you would want to make sure you're tracking those appropriately and maintaining the support behind the contribution you're recognizing you the the third thing is you do have more control over timing of recognition but you've got to be careful with that you don't want to pick an approach to kind of manage your earnings you want to have good solid explanations and purpose behind which approach you take not just hey next year we're probably not going to have as much contributions so we're going to take approach three like that that's not a good good reason behind it because that's kind of managing your earnings um so while you do have more control over it you do want to still make sure that you have good explanation and good rationale as to why you are following that approach and then there could be other stuff too um but those are just some some things that that we came up with as positives and negatives so now that you've accounted for it let's talk a little bit about some of the disclosure requirements that will be in your financial statements for the for the accounting for ppp so nonprofits with the material pvp loans they do need to adequately describe disclose their accounting policy for these loans and the impact that has on the financial statements so here's an example disclosure that you could use this disclosure i would i would put in just your summary of significant accounting policies so in this case um you know it explains that the nonprofit received a ppp loan it gives the amount of the loan and then it goes in and explains how you are accounting for that loan so which which approach you've elected to follow whether it's um the debt model versus the grant model so in this case this example is the grant model you're treating it as a conditional contribution and then you do want to disclose kind of the expected timing so like the blue part here you'd want to disclose which approach you're taking so if you're taking the most conservative approach of your you're recognizing you'll recognize it as revenue when you receive actual forgiveness then you'd want to you'd put that in there and then that last sentence kind of explains when that is expected to happen um or at the latest time when it's expected to happen so your application for forgiveness is due on a certain date um so that that's kind of a quick quick disclosure requirement explanation i have a couple of more examples on this next page so this is a debt model example and this kind of shows where it would be recorded on the balance sheet or statement of financial position so in this case under the debt model you're accounting for it as debt and as a loan um this example has this is not a classified balance sheet so it doesn't have it broken out between short term and long term um if you do have a classified balance sheet you would want to have that broken out ing to the loan agreement and then if you are using the debt model i think it'd be my personal opinion is it would be a good idea to have its own note not just have it in the summary of significant accounting policies but you you'd want its own note to kind of explain it so this is an example of a note you could have and it's pretty similar to what a standard note would be for a note payable but then throwing in just some of the ppp specific things so you disclose when you got the note the amount of the note the interest rate on the note and then just some other some other terms related to the note and you can read through those this example uh and you know it gives all that necessary information okay and then the grant model so under the grant model as we mentioned you you'd want to include it as a current liability you just call it a refundable advance in which in this case that's what it's called and then in the summary of significant accounting policies you would have a section for your refundable advance that just kind of explains what what that is and how you're accounting for it so in this case you know similar to the debt model you are disclosing that you got a ppp loan what the amount is and then just the method you're following so in this case you're following fasb958 you're treating it as a conditional contribution and then you do want to disclose kind of your expectation for when those conditions are going to be met which we covered in a couple slides ago so these are two examples of how you would want to have the ppp loan disclosed in your financial statements depending on the model you're following and this grant model example does have a classified balance sheet so it does show the refundable advance 100 as a current liability okay um if you have any questions on how to account for your ppp loan um feel free to reach out if there's anything that wasn't super clear in this training you can send me an email give me a phone call and i can help answer any of those questions you have you can reach out to anybody else here at larsen and company that you work with specifically and they've they've been through this training and they also know how they how these things should be accounted for so we we've got you covered here so yes feel free to reach out here's my last slide just giving you some more specific information on how to contact me or how to get more information on larsen and company specifically our non-profit practice so thank you for joining us hopefully you've learned some important things on how to account for your ppp loan thank you