Q&A for Nonprofit Senior Living Providers: PPP Funds

The timing and accounting for Paycheck Protection Program (PPP) loan forgiveness continues to be uncertain. As many senior living providers approach the close of their fiscal year, they need to understand how recognizing these PPP dollars in financial statements may affect current year financial performance, next year’s financial performance, debt covenants, and budgeting. Review relevant questions and guidance to provide clarity as you navigate the treatment of your PPP dollars.

What accounting standards apply to PPP funds?

Generally, two accounting standards apply to nonprofits’ accounting of PPP funds:

• ASC 470, Debt
• ASC 958-605, Revenue Recognition (Not-for-Profit Entities)

What is recommended for nonprofit senior living providers?

Consider ASC 958-605 — the guidance related to contribution and grant accounting — when you determine how to record PPP funds. Under this standard, the PPP funds are initially recognized as a “refundable advance.”

Contribution revenue can be recognized once the conditions of release are substantially met or explicitly waived. Classify any liability booked, such as a refundable advance, as a current or long-term liability based on the anticipated timing of meeting the derecognition criteria. We anticipate these would be classified as current liabilities.

If grant accounting under ASC 958-605 is used, what are the barriers of recognition?

While there is not universal consensus on what represents a barrier for PPP recognition criteria, there are some factors to consider.

Criteria	Might be a barrier	Might NOT be a barrier
Expects full or partial forgiveness	Always a barrier	N/A
Paid Eligible Costs (subject to program caps and restrictions)	Always a barrier	N/A
Maintained FTEs and wages relative to reference periods and/or met safe harbors	Reductions are based on full-time employee (FTE) counts and wages paid throughout an eight- or 24-week period (and in some cases, through December 31, 2020). ASC 958-605 does not permit recognition based on probabilities. Even if probable, recognition is not permitted if there is a possibility the condition will not be met.	While we expect this will be considered a barrier, there may be some rationale for recording partial forgiveness based on actual FTEs and wages paid as of a reporting date. Here are a couple examples: A provider’s eight-week period ends before June 30. If they were to file an application based on that eight weeks, they would have $800,000 forgiven of a $1 million loan. Based on that, the barrier for $800,000 may have been removed by June 30. If they later apply for full forgiveness using the 24-week period, the remaining $200,000 could be recognized in a subsequent period. The forgiveness calculation is based on averages. For example, if an entity maintained 100% of FTEs and wages through week 12 of its 24-week covered period, then it might reasonably make the case that forgiveness of 50% (based on 12 of 24 weeks) is no longer conditional. The logic is that even if all employees were terminated, its FTE quotient would be at least 50%.
Application and review process	The Small Business Administration (SBA) continues to make significant changes to PPP rules. For example, rules about basic program eligibility were being issued as recently as June 25, which is a few weeks after the earliest loans completed their eight-week covered period. We can reasonably assume that more rules and limitations will be issued that impact the amount of loan forgiveness. Loan forgiveness rules specifically do not seem fully defined at this time. The SBA review process will include a review of overall eligibility. Many lenders relied on borrower certifications of eligibility, so this will be the first review of overall eligibility. Potential issues could include:  Organizations with liquidity available to them might not have “economic need.” Ineligible nonprofit types — only 501(c)(3) and (c)(19) were eligible. Large nonprofits may have used the alternative size standard to apply but some SBA officials stated they won’t qualify.	Organization believes it clearly meets eligibility requirements, including economic need. Organization’s eligible costs well exceed the amount of forgiveness requested. Organization’s FTEs and wage rates well exceed levels needed for forgiveness. Organization believes it clearly meets any safe harbors being used.

When can I recognize contribution revenue from my PPP funds?

It’s clear that the forgiveness application and review process is a barrier. However, the standard-setting bodies have left this question intentionally open for interpretation. Consider these points:

• Two people might arrive at two different reasonable conclusions due to the lack of consensus related to PPP revenue recognition timing.
• If you recognize income prior to completing the forgiveness application and review process, you will likely be required to provide additional documentation and undergo additional audit procedures. If you wait until you receive legal release, the documentation and review requirements will be minimal.
• If you recognize income before the completion of the forgiveness application and review process, we recommend you gather the following documents, at a minimum, to explain why it is appropriate to recognize revenue:
  • Points to address:
    • Organization believes it clearly meets eligibility (including economic need) requirements for forgiveness
    • Organization’s eligible costs well exceed the amount of forgiveness being requested
    • Organization’s FTEs and wage rates well exceed levels needed for forgiveness
    • Organization believes it clearly meets any safe harbors being used 
  • PPP loan agreement
  • Draft or actual Form 3508, PPP Loan Forgiveness Application, including supporting documents. If the application has not yet been drafted, provide calculations of the amount of loan forgiveness based on application instructions. Also, document the calculation using the following:
    • Payroll reports and reconciliation to the application
    • Invoices and reconciliation to the application
    • Calculations and support for FTE and wage reduction tests
    • Support for any safe harbor elections

Does the timing of GAAP recognition of PPP funds impact my debt covenants?

It’s important to read your bond documents and debt agreements carefully to understand the impact of PPP funds on your debt covenants. Covenants impacted by PPP loans may not be cured simply because the GAAP financial statements have recognized income. Keep in mind:

• The legal form of the PPP funding is a debt obligation. Therefore, the borrower legally has a loan agreement outstanding until the PPP loan obligation is “legally released” or paid off.
• Derecognition of the liability under GAAP does not necessarily mean the entity has been legally released.
  • For example, if the entity has covenants in other debt instruments that restrict debt, acceptance of PPP funds could potentially violate a provider’s covenants — especially if classified as long-term debt. This is true despite an entity calling it a refundable advance and potentially derecognizing it earlier than the legal release.
• Income from PPP loan forgiveness may impact other debt covenants. In many cases, loan forgiveness or other income is excluded from certain financial covenant definitions, but unrestricted contribution revenue is generally allowed in financial covenant definitions.
• Given the information currently available and how the guidance is open to interpretation, questions don’t have bright line answers at this time. Your conclusion may be different, yet reasonable, from others. Consult with your lender or legal/bond counsel for additional clarity.

How we can help

For the latest information on PPP and other provider relief funds, please visit our COVID-19 Resource Center or our Health Care Innovation and Insight (HI2) Blog. If you have additional questions related to the timing and recognition of PPP funds, contact our team for further assistance.

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