By: Madison Gerdts, Supervisor, Whisman Giordano & Associates
Your organization successfully navigated the US Small Business Administration's (SBA) Paycheck Protection Program application process (PPP), were approved, and the money is in your account. Now, you may be asking yourself, "What's next?"
Before we begin on "next steps," let's do a quick overview of the intended purpose of the PPP:
The PPP intends to provide relief for payroll costs, and most mortgage interest, rent, and utility costs (non-payroll must be less than 25%). However, if payroll is reimbursed from other sources (i.e., another federal or state funding source), then the relief under PPP should not be used for those same employees' payroll. The relief should be applied towards payroll that is not already reimbursed from other governmental sources. During this time, internal controls, specifically controls monitoring the application of costs to each funding source, are vital to ensuring future grant compliance.
How to account for PPP funds?
The first thing to remember is that these funds are a loan, and you should develop a plan to repay the funds should the loan not be forgiven. In the coming weeks and months, we expect the SBA, Treasury Department, to issue further guidance on the parameters for loan forgiveness.
Organizations should consider taking a conservative accounting approach with their PPP by recording the funds received as debt. Upon confirmation that all (or a portion) of the loan will be forgiven, you would then reduce or wipe out the liability by recording a credit to unrestricted grant revenue. This approach could support a more accurate budget analysis as your organization relies on consistent revenue streams to cover operating expenses after PPP funds are gone. When preparing cash projections, consider reporting the PPP funds with other debt/lines of credit, "below the line."
If your loan is not forgiven, you will need to account for interest expense as the loan terms require payments over two- years, with a six-month deferral (so really, it's over 18-months) at an interest rate of one percent.
Also, consider the impact on your most recent financial statements. Depending on your fiscal yearend and audit schedule, financial statements for the prior year issued after receipt of your PPP loan should be disclosed as a subsequent event in the footnotes.
Documentation is crucial.
The need for reliable documentation and excellent record keeping is not a new concept for not-for-profit organizations. The situation with PPP is no different. You will need to maintain records that provide evidence on why the funding was necessary and that it was used correctly. Given the uncertainty as we await further guidance, remember that when it comes to documentation – there is no such thing as too much!
Some steps to help you through this process:
- Consider setting up a separate bank account. While not mandated, it is highly recommended.
- Establish an effective control environment to reduce the risk of noncompliance.
- Update policy manuals to include:
- How to account for and oversee the receipt and disbursement of federal funds
- How management exercises due diligence and remains current with rules and regulations mandated for federal loans.
- How risk is assessed, mitigated, and monitored to reduce the risk of noncompliance, whether due to fraud or error.
- Document all meetings held between levels of management and those charged with governance, and any professionals from whom guidance was sought
- Compile all budgets and cash-flow projections used to assess the financial viability of your organization. This would include the assumptions built into the cash flow that shows how COVID-19 is expected to affect your operations based on the industry, service sector, funding concentrations, target markets, etc.
- Track costs covered by PPP to ensure funding is not duplicated from another source. All costs must be supported by invoices (including payroll reports) and copies of the canceled check or bank transfer to show the payment equal to the expense total listed.
How does the loan size impact oversight?
If you received a loan greater than or equal to $750,000, there has been no guidance (yet) from the federal government to indicate these programs are excluded from the Single Audit requirements. However, on March 5, 2020, the American Institute of Certified Public Accountant's Government Audit Quality Center (AICPA) indicated that they received a definitive answer from the SBA suggesting PPP funding will not be subject to a Single Audit. We are still awaiting final confirmation from the Treasury Department.
You should track expenditures paid for using PPP funds just as you would other program costs included on your organization's annual Schedule of Expenditures of Federal Awards. It's important to note that if your organization was not previously subject to Single Audit requirements because you expended less than $750,000 of federal awards received, the additional PPP funds could put you over the stated threshold.
If you received a loan greater than or equal to $2,000,000, Treasury Secretary Mnuchin stated PPP loan recipients of $2 million or more will be subject to review by both the SBA and Treasury Department. If you fall into this category, you need to be ready to present all of the documentation you gathered for your application for this review. Further guidance outlining this process will be forthcoming.
In conclusion, if it seems like the rules are often changing, it is because they are. Congress rushed these funds out to provide a safety net for employers (and the ultimate beneficiary, their employees) in an unprecedented time of disruption in the United States. While Congress, the IRS, and the SBA continue to "figure things out," it is imperative to communicate with your team of professionals. In our opinion, this includes (at minimum) your banker, attorney, and accountant. In these unprecedented times, it is imperative to have your entire team working in tandem.
Madison Gerdts has 10 years of experience in public accounting and earned her accounting degree from the University of Delaware. She specializes in working with health care entities, low-income housing, not-for-profit organizations, and employee benefit plans. She is active in numerous community organizations such as the AIDS Delaware, Delaware Humane Society and Goodwill of Delaware and Delaware County.