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Accounting for PPP Loan Forgiveness

While many are still wondering how to obtain forgiveness of the loans, there are also accounting considerations to be addressed, including recording receipt of the loans, the timing and manner of recording forgiveness, and cash flow presentation.

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While many are still wondering how to obtain forgiveness of the loans, there are also accounting considerations to be addressed, including recording receipt of the loans, the timing and manner of recording forgiveness, and cash flow presentation.

Many businesses have applied for and already received funds under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  The purpose of these forgivable loans is to help businesses keep their workforce employed during the coronavirus (COVID-19) crisis.  While many are still wondering how to obtain forgiveness of the loans, there are also accounting considerations to be addressed, including recording receipt of the loans, the timing and manner of recording forgiveness, and cash flow presentation.  These questions are impacted by the accounting model selected, which may include accounting for PPP loans as:

  • Debt (ASC 470)
  • Government Grant (ASC 958-605)
  • Government Grant (IAS 20)
  • Gain Contingency (ASC 450)

Debt (ASC 470) 

Since the legal form of a PPP loan is debt, it will always be appropriate for a business receiving this loan to account for it as debt under Accounting Standards Codification (ASC) 470, regardless of whether the entity expects the loan to be forgiven.  Under ASC 470, an entity would recognize a liability for the full amount of the proceeds received and would accrue interest at the 1% rate.  There would not be a requirement to impute additional interest at a market rate because the guidance on imputing interest in ASC 835-30 excludes transactions where interest rates are prescribed by a government agency.

Costs paid to third parties in conjunction with securing the debt should be deferred and amortized over the term of the debt.  Such costs include external incremental costs such as document preparation costs, advisory, accounting and legal fees.

Under the debt model, a debt instrument is considered extinguished only when the borrower is legally released from being the primary obligor.  As it relates to the PPP, borrowers must formally apply for loan forgiveness, including providing documentation to verify the existence and accuracy of the qualified expenses.  Depending on the loan amount, the application for forgiveness may also be subject to review by the SBA.  The PPP obligation would be derecognized only when the debt is formally forgiven.

The gain that results from forgiveness will be measured based on the net carrying value of the PPP loan, which should include accrued interest (if forgiven) and unamortized deferred financing costs relating to the forgivable portion of the loan.  Within the income statement, this gain on extinguishment is presented as a separate line item.

For cash flow statement purposes, the receipt of the PPP loan proceeds accounted for as debt would be presented as a cash inflow from financing activities.  Any amounts repaid would be presented as cash outflows from financing activities, and any amounts forgiven would be shown as non-cash income.

Government Grant Model (ASC 958-605)

If an entity expects to comply with the eligibility and loan forgiveness criteria, it may elect to account for the forgivable PPP loan as, in substance, a government grant that is earned through the compliance with the loan forgiveness criteria.  If the entity does not expect to comply with the PPP eligibility and loan forgiveness criteria, the proceeds should be accounted for as debt, as discussed above.

U.S. GAAP does not address how for-profit business entities should account for government grants that are not in the form of a tax credit or revenue from a contract with a customer.  For profits may elect to apply the government grant model by analogy.  A not-for-profit entity that receives a government grant, and does not elect to account for it as debt, should apply ASC 958-605.

Under ASC 958-605, the PPP loan would be accounted for as a refundable advance until the conditions of forgiveness are substantially met.  This assessment is made as of the balance sheet date without regard to the probability that conditions may be met after the balance sheet date. Most entities will conclude that the conditions for forgiveness of a PPP loan include:

  1. Incurring qualifying expenditures
  2. Maintaining FTEs and salary levels during a measurement period ranging from 8-24 weeks

Some entities will conclude that due to the degree of uncertainty as guidance continues to evolve, it is appropriate to delay recognition of forgiveness of some or all of a PPP loan.  Others may conclude that it is appropriate to recognize the minimum forgivable amount of the loan as of the balance sheet date.  Suppose that as of the balance sheet date an entity has incurred $1,000,000 of qualifying expenditures and has maintained 100% of the required FTEs and salary levels for 6 weeks.  The entity may conclude that it is appropriate to recognize $750,000 of forgiveness ($1,000,000 x 6/8).  It may not, however, estimate the likelihood of earning additional forgiveness based on FTEs and salary levels maintained after year-end.

Costs incurred to obtain the loan would be expensed rather than capitalized since the loan is accounted for as a conditional contribution rather than as a debt instrument.

The proceeds of the loan should be included as a component of cash flows from operations on the statement of cash flows.

IAS 20

While not available to NFPs, business entities that account for PPP loan proceeds as government grants may choose to analogize to International Accounting Standards (IAS) 20, the IFRS accounting standard on accounting for government grants, because it includes an accounting framework for forgivable loans.  Under IAS 20, an entity would recognize forgiveness when there is “reasonable assurance” that conditions for forgiveness will be met.  While reasonable assurance is not defined by U.S. GAAP, AICPA interpretations state that it is analogous to “probable.”  In the case of a PPP loan, forgiveness would be recognized in the period that forgivable expenses are incurred, provided it is probable that they will be forgiven based on satisfying the headcount and salary conditions—which is more liberal than the ASC 958 model discussed above.  In accordance with IAS 20, forgiveness may either be accounted for as income or as an offset to qualifying expenditures.

As with ASC 958, we believe that costs incurred to obtain the loan should be expensed as incurred and that activity should be included as a component of cash flows from operations.

Gain Contingency (ASC 450)

Entities that elect to account for PPP loans as gain contingencies should initially record a liability upon receipt of the proceeds.  The liability would be derecognized when the gain is “realized or realizable.”  In the case of a PPP loan, this timing will be close to the time that the recipient is legally released from the obligation by the lender.

We believe that costs incurred to obtain the PPP loan should be expensed as incurred and that activity should be included as a component of cash flows from operations.

Disclosure

If material, the method of accounting for the grant should be disclosed in the entity’s significant accounting policies.  Disclosure may also include (1) the amount received, (2) the amount of forgiveness included in income during the reporting period or deferred, (3) the basis for recognizing any deferred amounts, (4) the terms and conditions of receipt, and (5) unfulfilled conditions and any contingent liability for repayment.

While the Financial Accounting Standards Board has not specifically commented on this issue, there may be additional guidance coming.

 

Disclaimer:  The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.

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