Currently, U.S. GAAP is inconclusive with respect to how and when a for‐profit entity should account for forgiveness of a PPP loan. Because of the lack of direct, authoritative literature, there are two possible “options” to account for a PPP loan. Each company must determine which option is most appropriate based on their individual circumstances. The following is a description of the literature and the options:
The options are as follows:
- ASC 470 Application ‐ Borrowers would treat the funds received from the PPP loan as they would any other financial liability, meaning interest would be accrued under the interest method in ASC 835. The PPP loan would be treated as a financial liability until the loan is either paid off or is partially/wholly forgiven. Be aware of the guidance on derecognizing a liability under ASC 405‐20, which allows derecognition of debt ‘if and only if it has been extinguished’, with extinguishment only considered to occur if the ‘debtor is legally released from being the primary obligor under the liability’. Once the loan meets the criteria to be forgiven, the liability would be reduced for the amount forgiven, and a gain on extinguishment would be recorded as other income in the income statement.
- IAS 20 Application – This literature may be appropriate when the loan forgiveness criteria have been met, but the debtor has not yet been legally released, as in ASC 470. The entity may determine the PPP loan is in substance a grant to be forgiven and apply International Accounting Standards (IAS) 20. Under IAS 20, government assistance is not recognized until it is probable that the assistance will be received, and grant conditions have been met. The earnings impact of the government grants would be recorded “on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate”. What this means is that the funds received from the PPP loan would be recorded as a deferred liability. The deferred liability would be reduced with an offset to earnings once there is reasonable assurance it will be received, as the entity recognizes costs such as compensation expense, for which the PPP loan is used (recorded either as other income or as a reduction to the related expense in the income statement). IAS 20 doesn’t provide a clear definition of “reasonable assurance”; however, it is thought to be analogous to “probable” (i.e. “likely to occur”) as defined under ASC 450‐20. This is a much lower threshold than “legally released from being the primary obligor” as cited in ASC 470. Potential advantages to using IAS 20 are earlier forgiveness recognition for a company, and disadvantages are the company has set a future policy for accounting for such grants.
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