can it be converted to retained earnings
What does this mean as far as the actual accounting entry? Exactly how would this entry look? Do you mean to make a journal entry directly to equity without recording an entry through the P&L?
In my mind, when the loan is forgiven, there should be a journal entry to debit the loan and credit Other Income - (Govt Grant). Then it closes to R/E when the period closes. For the federal tax return, it becomes non-taxable income. Then the discussion becomes exactly WHEN to record that entry, so the question becomes who actually has the final authority for the approval... the bank or the SBA? I know the approval application is submitted to the bank, but then the bank has to submit it to the SBA, so I would think the SBA approval is the actual decision.
Note that "Other Income" is not in the regular revenue section of the P&L.
It sounds like you are preparing in-house F/S. Have you explored what is the impact to your client on the various timing choices? Recording the forgiveness early could conceivably have more backlash than recording it after it is a final done deal. What is the FYE for your client? If Dec, then choosing Jan or Feb may not really have much of an impact, unless there are loan covenants or something else to contend with. In that case the F/S are not just being used in-house but are being used by a third party, which greatly changes your exposure.