On June 10, 2020 the American Institute of Certified Public Accountants (AICPA) released accounting guidance for Paycheck Protection Program (PPP) loans.
As borrowers received their PPP funds, questions emerged regarding how to account for them. As a result, the AICPA issued Technical Question and Answer (TQA) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program, to provide non-authoritative guidance on how a nongovernmental entity should account for a forgivable loan received under the PPP.
This article explores TQA 3200.18 and the accounting and reporting considerations for nongovernmental PPP borrowers.
The Paycheck Protection Program, perhaps the most notable component of the Coronavirus Aid, Relief, and Economic Security (CARES) Act issued in March 2020, represents a significant expansion of the U.S. Small Business Administration’s (SBA) 7(a) loan program. The driving principal of the PPP is to provide qualified small businesses with forgivable loans to keep their workers on payroll during the economic downturn resulting from the COVID-19 pandemic.
The PPP allows for loans of up to $10 million to small businesses with less than 500 employees to assist with payroll costs, rent, mortgage interest, or utilities during the coronavirus health crisis. If borrowing entities fulfill certain criteria, they may be eligible to receive partial or full forgiveness of the PPP loan’s principal amount and accrued interest.
For more information on the PPP, you may refer to the Squar Milner PPP FAQ.
The unique nature of the PPP has inspired numerous questions as to how a borrower should account for the loan in accordance with US Generally Accepted Accounting Principles (US GAAP).
Although the legal form of the PPP loan is debt, some believe the loan is, in substance, a government grant. There is no official guidance in existing US GAAP that specifically contemplates the accounting for forgivable loans obtained from, or guaranteed by, a governmental entity.
TQA 3200.18 provides non-authoritative guidance on how nongovernmental entities, including business entities and not-for-profit organizations, should account for a forgivable loan received under the PPP. The AICPA consulted with the Securities Exchange Commission (SEC) and Financial Accounting Standards Board (FASB), as well as various expert panels, to develop the TQA.
As noted in the TQA, the Staff of the Office of the Chief Accountant of the SEC have indicated they would not object to an SEC registrant accounting for a PPP loan under FASB Accounting Standards Codification (ASC) 740, Debt, or as a government grant by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, provided the entity meets certain conditions.
What is in the guidance?
The TQA includes multiple accounting options, which vary by entity type. The biggest takeaways are as follows:
ASC 740, Debt
Regardless of whether the nongovernmental entity expects their PPP loan to be forgiven, they have the option to account for the loan in accordance with ASC 740, Debt. With this option, the entity would:
- Initially record the cash inflow from the PPP loan as a financial liability and would accrue interest in accordance with the interest method under ASC Subtopic 835-30, Imputation of Interest
- Record interest at the stated loan rate (i.e., even if the stated rate is below the market rate)
- Continue to record the proceeds from the loan as a liability until either (1) the loan is partly or wholly forgiven and the debtor has been legally released, or (2) the debtor pays off the loan
- If legally released, record the amount forgiven as a gain on extinguishment.
IAS 20, Accounting for Government Grants and Disclosure of Government Assistance
The TQA also explains that if a nongovernmental entity (other than a not-for-profit) 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 IAS 20 to account for the PPP loan.
An entity that chooses this option would not be able to recognize government assistance until there is reasonable assurance (akin to “probable” in US GAAP) that any conditions attached to the assistance will be met and the assistance will be received.
Under this guidance:
- The entity would record the loan as deferred income liability
- Once it is reasonably assured that the conditions for forgiveness will be met, the entity would systematically reduce the liability with an offset to earnings as the related costs are incurred.
- The offset earnings can be presented as:
- A credit, in a separate line item or under a general heading such as other income; or
- A reduction of the related expenses.
ASC 958-605, Contributions
Although the scope of ASC 958-605 excludes business entities, the FASB staff has acknowledged that business entities may analogize the guidance when appropriate.
Under this model, the entity initially records the PPP loan proceeds as a refundable advance. Once the forgiveness conditions are substantially met or explicitly waived, the entity would reduce the refundable advance and record a contribution for the amount forgiven.
Note that if a not-for-profit organization elects to not follow ASC 740 and expects to satisfy the PPP’s eligibility criteria and concludes the loan represents, in substance, a grant that is expected to be forgiven, it should account for the PPP loan proceeds in accordance with ASC 958-605 as a conditional contribution.
ASC 450-30, Gain Contingencies
Under this model, the entity treats income from a conditional grant as a gain contingency.
A borrower applying this model initially records the PPP loan proceeds as a liability. Then, when all contingencies related to forgiveness have been met and the amount forgiven becomes realized or realizable, the entity would reduce the liability with a corresponding offset to earnings.
Regardless of accounting treatment, nongovernmental entities should provide clear and robust financial statement disclosures regarding their accounting policy for PPP loans and the related impact.
How can Squar Milner help?
For more information on PPP loan accounting and reporting considerations, please contact your Squar Milner advisor. You can also visit the COVID-19 Resource Center to read additional insights on the PPP, loan forgiveness and more.
You can check out our PPP services to determine how our PPP experts can best satisfy your business’ needs.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.