The Paycheck Protection Program (PPP) provides small businesses and other eligible entities with funds in the form of low-interest loans that are guaranteed by the Small Business Administration (SBA).
To assist entities in accounting for loans received under the PPP, the American Institute of Certified Public Accountants (AICPA) issued Technical Question and Answer (TQA) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program, on June 10, 2020.
The Governmental Accounting Standards Board (GASB) also issued proposed Technical Bulletin 2020-a, Accounting and Financial Reporting Issues Related to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020 and Coronavirus Diseases on June 11, 2020.
Below we address accounting and reporting considerations for borrowers—both nongovernmental and governmental entities—that obtained PPP loans.
The PPP was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, through a significant expansion of the SBA 7(a) loan program. It was designed to provide a direct incentive for small businesses to keep their workers on the payroll.
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 COVID-19 pandemic. Under Section 1106 of the CARES Act, entities could be eligible for forgiveness of the principal amount and accrued interest on PPP loans if certain criteria are met.
The question of how to appropriately interpret and apply the PPP loan forgiveness criteria has been an area of high interest since the enactment of the CARES Act. The PPP Flexibility Act was signed into law on June 5, 2020, which generally improved borrowers’ ability to qualify for forgiveness.
Additionally, the SBA continues to update its published Paycheck Protection Program Loans Frequently Asked Questions to provide additional guidance to borrowers and lenders.
Given the unique nature of the PPP, questions have arisen as to how a borrower should account for the loan in accordance with US Generally Accepted Accounting Principles (GAAP).
Although the legal form of the PPP loan is debt, some believe that the loan is, in substance, a government grant. There’s no 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 nonauthoritative guidance on how nongovernmental entities, including business entities and not-for-profit entities, should account for a forgivable loan received under the PPP. The AICPA staff consulted with the SEC and Financial Accounting Standards Board (FASB) staff, as well as various expert panels, to develop the TQA.
As indicated in the TQA, the staff of the Office of the Chief Accountant of the SEC have indicated they wouldn’t object to an SEC registrant accounting for a PPP loan under FASB Accounting Standards Codification (ASC) 470, Debt, or as a government grant by analogy to International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, provided certain conditions are met.
More details are provided below on the specific accounting considerations.
Regardless of whether a nongovernmental entity expects to repay the PPP loan or believes it represents an in-substance grant, the loan may always be accounted for as a financial liability in accordance with ASC 470, Debt, with interest accrued in accordance with the interest method under ASC 835-30, Imputation of Interest.
Following the guidance in ASC 470, a borrower would recognize the entire loan amount as a liability on the balance sheet, with interest accrued and expensed over the term of the loan. The entity wouldn’t impute additional interest at a market rate because transactions where interest rates are prescribed by governmental agencies are excluded from the scope of ASC 835-30.
For purposes of derecognizing the liability, ASC 470 refers to the extinguishment guidance in ASC 405, Liabilities.
Based on that guidance, the loan would remain recorded as a liability until either of the following criteria are met:
- The entity has been legally released from being the primary obligor under the liability.
- The entity pays the lender and is relieved of its obligation for the liability.
Because a borrower wouldn’t be legally released from being the primary obligor of a PPP loan until forgiveness is actually granted, income from the extinguishment of the loan would only be recognized once the borrower’s application for forgiveness is approved.
Any amount forgiven would be recognized in the income statement as a gain on extinguishment.
In-Substance Government Grants
Borrowers may also conclude that a PPP loan should be accounted for as an in-substance government grant based on its circumstances.
The TQA states that if a business entity expects to meet the PPP eligibility criteria and concludes that the loan represents, in substance, a grant that's expected to be forgiven, it may analogize to the guidance in IAS 20, Accounting for Government Grants and Disclosure of Government Assistance.
The AICPA staff observed that business entities may also analogize to not-for-profit entity (NFP) guidance in ASC 958-605, Revenue Recognition, or to ASC 450-30, Gain Contingencies, if the borrower expects to meet the PPP’s eligibility criteria and expects the loan to be forgiven.
A NFP that chooses not to account for the loan under ASC 470 and expects to meet the PPP’s eligibility requirements and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, should account for the PPP loan in accordance with ASC 958-605 as a conditional contribution.
IAS 20 outlines an accounting model for different forms of government assistance, including forgivable loans.
Under IAS 20, government assistance isn’t recognized until there’s reasonable assurance that:
- Any conditions attached to the assistance will be met.
- The assistance will be received.
The term reasonable assurance isn’t defined in IAS 20, but is generally viewed as a similar threshold to probable in US GAAP.
If the entity is able to assert that it meets all qualifications for the PPP loan and that forgiveness is probable, the proceeds from the loan would initially be recognized as a deferred income liability. Subsequently, the entity would reduce the liability and recognize income on a systematic basis over the period in which the entity recognizes the related costs for which the PPP loan is intended to compensate, for example, payroll costs.
Under the IAS 20 model, PPP loan income would be presented on the income statement as either:
- A credit, in a separate line item or under a general heading such as other income
- A reduction of the related expenses
Although the scope of ASC 958-605 excludes business entities, the FASB staff has acknowledged that business entities aren’t precluded from applying the guidance by analogy when appropriate.
The conditional contribution model is discussed in more detail below.
Under this model, income from a conditional grant is treated as a gain contingency.
A borrower applying this model would initially recognize PPP loan proceeds as a liability. The earnings impact of gain contingency is recognized when all the contingencies related to the assistance have been met and the gain is realized or realizable.
In accordance with ASC 958-605, conditional contributions aren’t recognized until the conditions are substantially met or explicitly waived. In cases where conditions are met over time or in stages, contributions should be recognized as qualifying expenses are incurred.
Under this model, the proceeds from a PPP loan would initially be recognized as a refundable advance—a liability—until the conditions for forgiveness are substantially met. The borrower would subsequently recognize contribution revenue as it incurs qualifying PPP expenses, assuming all other conditions are substantially met.
Nongovernmental entities should disclose their accounting policy for PPP loans and the related impact to the financial statements.
Proposed Technical Bulletin 2020-a would provide guidance on how governmental entities should account for a forgivable loan received under the PPP.
Among other items, the guidance in the proposed technical bulletin would clarify that an entity that reports in accordance with GASB standards should account for a PPP loan as a liability in accordance with Statement 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, until that entity is legally released from the debt.
During the period in which the entity is legally released from the debt, an inflow of resources should be reported.
Comments on the proposed technical bulletin are due by June 25, 2020, and the GASB is scheduled to review feedback and consider a final Technical Bulletin on June 30, 2020.
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For more information on the accounting and reporting considerations for loans obtained under the PPP, contact your Moss Adams professional.
Please also visit our PPP spotlight page for additional insight on loan forgiveness or direct your specific questions to our Financial Strategies professionals.