- The AICPA and GASB recently clarified the options for how to account for PPP loans.
- While the clarifications provide flexibility, you may find it challenging to support recognition of income prior to the application and review process.
- Consult with your advisors on the technical details specific to your organization.
There has been understandable confusion about how to account for forgivable loan proceeds under the Small Business Administration’s Paycheck Protection Program (PPP). At first blush, the accounting solution seems cut and dry:
Have accounting questions about PPP proceeds?
- Since you signed a loan agreement, you record the loan as debt.
- Interest would be accrued and recorded based on the stated rate in the loan agreement.1
- If some or all of the loan is forgiven, you would record income when legally released from the liability.
Unfortunately — as with so much of the PPP loan program — it’s much more complicated when we dive into the details.
Accounting options for PPP loans
There are actually five options for accounting for PPP loans. In June 2020, 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, and in July 2020, GASB issued Technical Bulletin 2020-1, Accounting and Financial Reporting Issues Related to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Coronavirus Diseases. Within the TQA and Technical Bulletin, the following options were provided:
|Standards||Applicability||Applies to For Profit?||Applies to Nonprofit?|
|ASC 470, Debt||This is an option for any PPP loan||Yes||Yes|
|ASC 958-605, Revenue Recognition (Not-for-Profit Entities)||Option if entity meets eligibility criteria and concludes PPP loan represents, in substance, a grant that is expected to be forgiven||Yes*||Yes|
|ASC 450-30, Gain Contingencies||Same as ASC 958-605||Yes*||No|
|IAS 20, Accounting for Government Grants and Disclosure of Government Assistance||Same as ASC 958-605||Yes*||No|
|GASBS 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees||Governmental entity (i.e., nonprofit that reports under GASB)||No||Yes|
*While these standards normally would not apply, the AICPA has stated the borrower may analogize.
How does accounting differ under these options?
Depending on which option is applied, the results will differ. That is true both in presentation and descriptions, but potentially also with respect to timing of derecognition of the liability. Here is a table that briefly summarizes each option.
|ASC 470||Financial liability2||Accrue interest||Debtor has been “legally released” or pays off loan. Forgiveness is recorded as a gain on extinguishment.|
|ASC 958-605||Refundable advance||n/a||Contribution recognized once the conditions of release have been substantially met or explicitly waived.|
|ASC 450-30||Liability||n/a||Grant proceeds recognized when all of the contingencies related to receipt of the assistance have been met and the gain is realized or realizable.|
|IAS 20||Deferred income liability||n/a||Government assistance recognized when there is “reasonable assurance” (similar to “probable” threshold in U.S. GAAP) that conditions will be met and assistance will be received. Amount is recorded as either a credit (such as other income) or a reduction of related expenses.|
|GASBS 70||Loan||Accrue interest||Debtor has been “legally released” or pays off loan. Forgiveness is recorded as an inflow of resources in the reporting period to the extent that the entity is legally released from debt.|
Classification of liabilities also depends on which standard you follow.
Liabilities under ASC 470 and GASBS 70
These liabilities would be classified based on the loan agreement and amortization schedule. PPP loans mature between two and five years, with initial payments deferred for a period of time. That length of that deferral depends on the timing of the loan forgiveness application.3
- If you apply with your lender within 10 months after the end of the loan forgiveness covered period, you will not have to make any payments of principal or interest on the loan before the date on which SBA remits the loan forgiveness amount to the lender (or notifies the lender that no loan forgiveness is allowed).
- If your loan forgiveness application is not submitted to the lender within 10 months after the end of the loan forgiveness covered period, you must begin paying principal and interest.
Liabilities under ASC 958-605, ASC 450-30, and IAS 20
These liabilities would be classified based on the anticipated timing of meeting the derecognition criteria. We generally expect these to be classified as current liabilities.
So what is the timing of derecognizing the liability?
While the standards provide a framework — and are quite clear for ASC 470 and GASBS 70 — they stop short of being prescriptive. An SC 470 or GASBS 70 liability remains a liability until the debtor has been “legally released.” However, there is no bright-line test for liabilities under ASC 958-605, ASC 450-30, and IAS 20. Ultimately, you need to apply judgment in order to make a decision — but let’s talk through the framework to help with that process.
Under the ASC 958-605 framework, you would derecognize the liability and record a contribution once conditions of release have been substantially met or explicitly waived. In order to determine when that occurs, start by considering what factors might be a barrier for you to achieve full or partial forgiveness of a PPP loan. Here are some potential barriers:
|Criteria||Factors Indicating it Might Be a Barrier||Factors Indicating it Might NOT Be a Barrier|
|Expects full or partial forgiveness||Always a barrier||n/a|
|Paid eligible costs (subject to program caps and restrictions)||Always a barrier||n/a|
|Maintained FTEs4 and wages relative to reference periods and/or met safe harbors||
While we generally expect this will be considered a barrier, there may be some rationale for recording partial forgiveness based on actual FTEs and wages paid as of a reporting date. Consider this example:
|Application and review process5||
Can an organization record income now?
Not necessarily. While there might be new options available to you, the “devil is in the details.” Most organizations with PPP loans are realizing that there can be some complexities in determining forgiveness. Guidance continues to evolve, so it may be difficult to support a position that income should be recognized in advance of completing the application and review process.
Whichever option is chosen, you should adequately disclose your accounting policy for such loans and the related impact to the financial statements.
Certification — are you eligible for forgiveness?
Section 1106(b) of the CARES Act provides for forgiveness of a PPP loan only if you are an “eligible recipient” as defined by 15 U.S.C. § 636(a)(36)(A)(iv) and rules and guidance. This promotes the public interest and aligns the SBA’s functions with other governmental policies, and allows the SBA to carry out the CARES Act’s PPP provisions (including PPP loan eligibility).
Based on this guidance, the SBA may direct a lender to disapprove your loan forgiveness application if the SBA determines that you do not qualify as an eligible recipient for the loan.
Keep this in mind when considering accounting for forgiveness.
How we can help
As you face challenges now and in the months ahead, CLA is here to assist you. From general accounting assistance to assistance applying for loan forgiveness, our team has the experience to meet your organization’s specific needs.
1Even though the stated rate for PPP loans may be below the market rate, interest would not be imputed because ASC 835-30 does not apply where interest rates are prescribed by governmental agencies.
2An entity would not impute additional interest at a market rate (even though the stated interest rate may be below market) because transactions where interest rates are prescribed by governmental agencies (for example, government guaranteed obligations) are excluded from the scope of the FASB ASC 835-30 guidance on imputing interest.
3Note that loan agreements written prior to the PPP Flexibility Act of 2020 (June 5) may be outdated. The law changed the loan deferral terms retroactively. Even if the lender did not update the loan agreement, the PPP Flexibility Act and subsequent regulations would supersede the loan agreement.
4Note that “borrowers that can certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with such COVID Requirements or Guidance are exempt from any reduction in their forgiveness amount stemming from a reduction in FTE employees during the covered period.” Because there is relatively little guidance on use of this safe harbor, it may be a further factor indicating that the application and review process is a barrier.
5For the review process, lenders have 60 days to review loan forgiveness applications and then the SBA has an additional 90 days. Upon completing the review, there will be a determination made as to the amount of forgiveness (subject to an appeals process if there is a dispute). At some point after that — timing not yet determined — SBA will pay the lender for the portion forgiven, which we expect will be associated with the legal release of the borrower from that liability.