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Guidance Issued by the AICPA on Accounting and Reporting for PPP Loan Forgiveness

Posted by Kelli Bernstein on Jun 12, 2020 9:43:36 AM

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We have all been waiting for guidance to be issued related to accounting for forgiveness of Paycheck Protection Program (PPP) Loans. On June 10, 2020, the AICPA issued such guidance in the form of a Technical Question and Answer (TQA)  3200.18 Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program. The TQA specifically addresses nongovernmental entities.

The guidance issued in the TQA is not much different than that which was anticipated under existing guidance. A summary of the accounting for forgiveness of PPP Loans under this TQA is as follows:
  • Nongovernmental Entity (business entity, excluding not-for-profit entities), can either:

    • Regardless of if an entity expects to repay the PPP loan or believes, in substance, it is a grant that is expected to be forgiven, the PPP loan may be accounted for as a financial liability under ASC Topic 470. Under ASC Topic 470, borrowers would treat the funds received from the PPP loan as they would any other financial liability; interest would be accrued under the interest method in ASC Topic 835; however, in accordance with ASC 835-30-15-3(e), additional interest would not be imputed by using a market rate (even though the PPP loan interest rate may be below market).  The PPP loan would be treated as a financial liability until the loan is either paid off, or until the loan is partly/wholly forgiven (it is important to be aware for the forgiveness, 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’.  Once the loan meets the criteria to be forgiven (debtor is legally released), the liability would be reduced for the amount forgiven, and a gain on extinguishment would be recorded.

    • If the entity expects to meet the loan forgiveness criteria, and determines that the PPP loan represents, in substance, a grant that is expected to be forgiven, the entity could account for it similar to a conditional contribution under ASC Subtopic 958-605. In this case,  the funds received from the PPP loan are recorded as a refundable advance. The recognition of the contribution (i.e. grant) in the income statement is deferred until all uncertainties are resolved and the income (from the forgiveness) becomes ‘realized’, at which time the refundable advance is reduced.

    • If the entity expects to meet the eligibility criteria for the PPP loan and determines it is ‘in substance’ a grant to be forgiven, it can also equate the situation to IAS 20. Under IAS 20, government assistance is not recognized until it is probable that the government assistance will be received and conditions for the PPP loan are 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; Then, the deferred liability would be reduced with an offset to earnings (either other income or as a reduction to the related expense), as the entity recognizes costs such as compensation expense, for which the PPP loan is used.

  • Nongovernmental Entity (not-for-profit entity): A not-for-profit entity could account for a PPP loan under ASC Topic 470 discussed above, or else if it expects to meet PPP eligibility criteria and determines, in substance, it is a grant expected to be forgiven, it should account for the PPP loan as a conditional contribution under ASC 958-605, as discussed above.

  • SEC Entity: Based on SEC staff views, an SEC registrant could account for a PPP loan under ASC Topic 470 discussed above, or as a government grant under IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, provided certain conditions are met.

Adequate disclosure of the policy utilized above, is important in the notes to the financial statements for entities that have obtained PPP loans.

AFTER ALL THE ABOVE TECHNICAL WORDING, HOW CAN A FOR PROFIT ENTITY ACCOUNT FOR FORGIVENESS OF A PPP LOAN?  The entity can treat the PPP loan as regular debt, then once it is forgiven in whole or in part (i.e. debtor is legally released), record a reduction of debt and a gain on extinguishment for the amount forgiven.

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.