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Considerations on Accounting and Reporting for PPP Loan Forgiveness

Posted by Kelli Bernstein on May 22, 2020 8:36:32 PM

Financial paper charts and graphs on the table-1

Here we are at the end of May, and there is still no guidance that has come out under U.S. GAAP, which specifically addresses the accounting for loan forgiveness from the government under the Paycheck Protection Program (PPP)Due to the lack of such guidance at the current time, borrowers have two different ways they could account for PPP loans, as follows:

  • As debt: If treated as debt under ASC 470, borrowers would apply the interest method, taking into consideration the payment deferrals allowed for these loans; however, in accordance with ASC 835-30-15-3(e), additional interest would not be imputed by using a market rate even though the stated interest rate likely is considered to be below market.

    Also, if treated as debt, it is important to be aware of 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 being considered to occur if the ‘debtor is legally released from being the primary obligor under the liability’.  To be legally released, the entity would need to meet the criteria for forgiveness and would receive confirmation from the lender or the SBA that the loan is forgiven. If criteria for forgiveness of the PPP loan are not met, the entity would not be legally released from being the primary obligor of the debt.

  • As a government grant: If treated as a government grant, it may be treated similar to a conditional grant, whereby recognition of the grant in the income statement is deferred until all uncertainties are resolved and the income (from the forgiveness) becomes ‘realized’.

Financial statement presentation:

  • Balance sheet: An entity should recognize the entire loan amount as a liability, classified as current or noncurrent if an entity has a classified balance sheet; and accrued interest recognized, as appropriate.

  • Income statement: Interest would be expensed over the term of the loan. If the loan is forgiven, when the entity is legally released as the primary obligor under the loan, it would be recognized as a gain from the extinguishment of the loan.

  • Cash flow: The initial receipt of the PPP proceeds would be presented as a cash inflow from financing activities, any interest paid would be presented as a cash outflow for operating activities, and any principal repaid will be presented as a cash outflow for financing activities. If the debt is then forgiven, that amount would be disclosed as a noncash financing activity.

We will continue to closely monitor any updates from FASB and/or regulators to address application of U.S. GAAP to PPP loans. Contact us if you have any questions.

Topics: Small Business, Accounting & Auditing, Accounting and Tax Resource, COVID-19

Kelli Bernstein

Kelli Bernstein

Kelli is a Vice President in the Assurance Services Group and is a key member of the firm’s not-for-profit core group. She oversees the firm’s quality control procedures. In addition, she is involved with researching technical accounting issues.