During June 2020, the American Institute of Certified Public Accountants (AICPA) released non-authoritative guidance which addresses how a nongovernmental entity should account for a forgivable loan received under the Small Business Administration’s (SBA) Paycheck Protection Program (PPP). According to the non-authoritative guidance, there are several options available to entities which they may choose to follow in accounting for PPP loan forgiveness.
Regardless of whether an entity expects to repay the PPP loan or believes it represents, in substance, a grant that is expected to be forgiven, the entity may account for the loan as a financial liability in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 470, Debt. In order to account for the PPP loan under FASB ASC 470, the entity is required to:
- Record the initial cash inflow as a financial liability;
- Accrue interest in accordance with the interest method (under FASB ASC 835-30);
- Refrain from imputing additional interest at a market rate as transactions where interest rates are prescribed by governmental agencies are excluded from the scope of the FASB ASC 835-30 guidance;
- Record the loan as a liability until either (1) the loan is, in part or wholly, forgiven and the debtor has been “legally released” or (2) the debtor pays off the loan to the creditor; and
- Reduce the liability by the amount forgiven and record a gain on extinguishment once the loan is, in part or wholly, forgiven and legal release is received.
If an entity expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may analogize to FASB ASC 958-605, Not-for-Profit Entities – Revenue Recognition, FASB ASC 450-30, Gain Contingencies or International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.
FASB ASC 958-605 addresses the accounting for contributions by not-for-profit entities, though it can also be used by for-profit entities, when appropriate. Under this model, an entity would account for the PPP loan by:
- Recording the initial cash inflow as a refundable advance; and
- Reducing the liability and recognizing other income when the conditions of loan forgiveness have been substantially met or explicitly waived.
FASB ASC 450-30 outlines a model for gain contingency recognition. Under this model, an entity would begin by accounting for the PPP loan forgiveness process by:
- Recording the initial cash flow as a liability; and
- Reducing the liability and recognizing other income at a time when the loan proceeds are realized or realizable.
Under IAS 20, government assistance is not recognized until it is probable that (1) any conditions attached to the assistance will be met and (2) the assistance will be received. Once the probable threshold is met, the loan is recorded to earnings on a systematic basis over the periods in which the entity recognizes, as expenses, the related costs for which the grants are intended to compensate. Under IAS 20, an entity would need to enact the following accounting measures for PPP loan forgiveness by:
- Recording the initial cash inflow as a deferred income liability; and/or
- Reducing the liability with an offset to the income statement either separately (as other income) or as a reduction of the related expenses, as it recognizes the related cost to which the loan relates.
The determination of which methodology to use will require significant judgment of each specific fact and circumstance. Companies should consider all of the available options and apply the authoritative guidance most suitable to their situation. With the latest extension of the PPP loan program and the potential lengthy forgiveness application process currently in place, it is now likely that accounting for a PPP loan under differing authoritative guidance could lead to entities accounting for the derecognition of the PPP loan liability in a different fiscal year than that in which the qualifying expenses were incurred. For example, under FASB ASC 470, it is likely the accounting for the extinguishment of debt would occur upon approval of the debt forgiveness from the SBA which could occur in a fiscal year other than the fiscal year in which the qualified expenses occurred.
As the methodology for accounting for PPP loan forgiveness is complex, consulting with your accounting advisor is a wise choice. For questions about US GAAP accounting for PPP loans, please contact your Untracht Early advisor for guidance.