The Paycheck Protection Program (PPP) authorized the Small Business Administration to guarantee loans that can be forgiven if certain conditions are satisfied. There has been plenty of uncertainty related to the intent, qualifications, and financial reporting related to PPP loans. The AICPA recently issued nonauthoritative guidance addressing how nongovernmental entities should account for PPP loans as there is no authoritative guidance for business entities related to this type of transaction in Accounting Principles Generally Accepted in the United States (GAAP):
Accounting Treatment Options
There are two primary accounting treatment options for a PPP loan, as discussed below. If a business entity already has accounting policies in place to account for government grants, they should consider whether the existing policy will be used to account for the PPP loan.
- Account for the PPP Loan as Debt under FASB Accounting Standards Codification (FASB ASC) 470, Debt
- Not-for-Profit Entities & Business Entities: This method can be used regardless of the repayment or expected forgiveness of the PPP loan. Further, the entity should accrue interest in accordance with the interest method, but additional imputed interest at the market rate is not required (even though the stated rates on PPP loans are generally below market rates). Derecognition of the liability would be recorded under extinguishment guidance in FASB ASC 405-20-40-1 and states that extinguishment of the debt cannot take place until the debtor has been legally released as the primary obligor. Therefore, once the loan is in part or wholly forgiven and legal release is received the entity would reduce the liability by the amount paid and/or forgiven and record a gain on extinguishment.
- Account for the PPP Loan as a Government Grant by analogy to one of the following, if the business expects to meet the forgiveness eligibility requirements and concludes that, in substance, the PPP loan represents a grant that is expected to be forgiven
- Not-for-Profit Entities & Business Entities: FASB ASC 958-605, Revenue Recognition. This model would treat the funds as a conditional contribution. The initial cash inflow from the PPP loan would be recorded as a refundable advance. The refundable advance would be reduced and contribution income recognized once the conditions of release have been substantially met or explicitly waived.
- Business Entities: FASB ASC 450-30, Gain Contingencies. This model may have been used by business entities for prior grants and therefore could be considered for the PPP loans. When the cash inflow from the PPP loan is received the entity would record a liability and the liability would remain on the books until the grant proceeds are realized or realizable, at which time income would be recognized.
- Business Entities: International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance. IAS 20 provides more robust guidance on government grants to business entities but is nonauthoritative guidance for an entity using GAAP. This model is similar to not-for-profit accounting for contributions and government grants under FASB ASC 958-605. This method would recognize a deferred income liability when there is “reasonable assurance” that (1) any conditions attached to the assistance will be met, and (2) the assistance will be received. The deferred income liability would be reduced and income would be recorded over the period in which the entity recognizes the expenses related to the grant on a systematic basis (generally as the expenses are incurred). Income should be recognized as “other income.”
Currently, the most conservative and likely most widely accepted accounting treatment for PPP loans would be to record them as debt under option 1 above. However, as more information becomes available related to the forgiveness of PPP loans, the other options above may be appropriate. Therefore, businesses will need to exercise professional judgement in determining the accounting treatment and policies which are most appropriate for the facts and circumstances related to their loan. Documentation to support the conclusions reached and the ultimate accounting treatment for the PPP loan, and other government assistance, should be maintained.
Currently, there are not specific disclosure requirements for PPP loans. However, the disclosure requirements in the FASB ASC section used would be applicable once the accounting treatment is determined. Entities should also disclose the significant terms of the PPP loan and the accounting policy for the PPP loan. Disclosure should also be made for any potential contingencies or repayments which may be applicable given the audit terms under the PPP loan agreements.
Further guidance is expected on accounting and required disclosures for the government assistance programs in the CARES Act. The AICPA is currently working on PPP loan accounting treatment for governmental entities, healthcare entities, and lenders. Updates will be provided for any additional guidance. We are here to help. Please reach out to your KSM advisor for help or complete this form.
About the Author
Mike Lee is a partner in KSM’s Audit and Assurance Services Group. Mike works with clients to help them avoid risk and maximize efficiencies by keeping an eye on their bottom line and helping ensure accurate financial reporting. Connect with him on LinkedIn.
About the Author
Jessica Boicourt is a manager in Katz, Sapper & Miller’s Audit and Assurance Services Group. As a member of the firm’s Technical Resource Group, Jessica is involved in technical accounting research and internal quality assurance processes, serving as a resource for KSM staff. Connect with her on LinkedIn.