So much about the SBA’s Paycheck Protection Program (PPP) was unique – from the enormity of its funding to its full loan forgiveness potential. This uniqueness calls for new guidance on how borrowers should report and account for this unprecedented relief.
The American Institute of CPAs (AICPA) recently set forth accounting method options that for-profit and not-for-profit borrowers can use to report a loan under the PPP. These options are outlined in the AICPA’s Q&A Section 3200.18 Long-Term Debt.
Business Entity Accounting (For-Profit)
Though its legal form is debt, a PPP loan may be considered a government grant in substance, and for-profit entities can account for it in one of the following ways:
1. Loan under FASB ASC 470, Debt. Under this method:
- Loan funds will accrue interest under FASB ASC 835-30 and additional interest should not be imputed even though rate is below market.
- Derecognize liability under ASC 405-20-40-1 only when the loan is forgiven in whole or part and borrower is legally released or the borrower pays off the loan.
- Once loan is forgiven in whole or in part and borrower is legally released, debit Loan Payable and credit Gain on Extinguishment.
- Once the borrower pays off the loan, debit Loan Payable and credit the Cash account.
2. Governmental grant by analogy to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. Under this method:
- Do not recognize assistance until the borrower has reasonable assurance (similar to “probable”) that conditions will be met and assistance will be received.
- Once threshold is met, recognize earnings impact over period in which the business entity incurs the costs the grant is intended to compensate.
- When the entity receives the funds, debit the Cash account and credit Deferred Liability.
- When threshold for forgiveness is met, record ratably over the relevant period. Debit Deferred Liability and credit Other Income (or reduction in Compensation expense or other cost to be covered).
3. Conditional contribution by analogy to FASB ASC 958-605. Under this method:
- Contribution is conditional given the requirements of forgiveness, so earnings should not be recognized until requirements are substantially met or explicitly waived.
- Once the business entity receives the funds, debit Cash and credit Refundable Advance.
- Once conditions of release have been substantially met or explicitly waived, debit Refundable Advance and credit Contributions.
4. Gain contingency by analogy to FASB ASC 450-30. Under this method:
- Earnings impact is recognized when all contingencies related to receipt of the assistance are met and gain is realized or realizable.
- When the business entity receives the funds, debit the Cash account and credit Loan Payable.
- When all contingencies are met and gain is realized or realizable, debit Loan Payable and credit Gain.
Nonprofit Accounting
Unlike their for-profit counterparts, nonprofit PPP borrowers have only two choices of accounting method when reporting PPP funds:
1. Loan under FASB ASC 470, Debt. Under this method:
- Interest should be accrued under FASB ASC 835-30 and additional interest should not be imputed even though rate is below market.
- Derecognize liability under ASC 405-20-40-1 only when either the loan is forgiven in whole or part and borrower is legally released (debit the Loan Payable and credit Gain on Extinguishment) or borrower pays off the loan (debit the Loan Payable and credit Cash).
2. Conditional contribution by analogy to FASB ASC 958-605. This method should be chosen if the nonprofit entity deems the loan to be, in substance, a grant to be forgiven. Under this method:
- Contribution is conditional, given the requirements of loan forgiveness. Do not recognize earnings until requirements are substantially met or explicitly waived.
- Once the nonprofit receives the funds, debit Cash and credit Refundable Advance.
- Once the conditions of release have been substantially met or explicitly waived, debit Refundable Advance and credit Contributions.
The Securities & Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) have both indicated that they would not object to the accounting methods above. Regardless of the method used, all entities with material PPP loans should disclose their accounting policy for such loans and the related impact to the financial statements.
