PPP Loans - Timing of Recognition of Forgiveness

If your organization took out a PPP loan, you likely are thinking about the timing of when you will apply for any eligible forgiveness. You may also be thinking of when you will recognize the forgiveness, especially if you have an upcoming fiscal year end.

The FASB has not come out with anything specifically related to this at the present time, and it is possible they may not come out with guidance to address this specific to PPP loans. Based on lack of authoritative guidance specifically for PPP loans, below are what the current thoughts in the industry are (keeping in mind this may be updated if authoritative guidance does come out).

If your organization concluded that the PPP loan should be accounted for as debt under the Accounting Standards Codification (ASC) Topic 470, below are a couple of things to think about related to when to recognize the forgiveness:

• Excerpt from the ASC 405-20-40 Liabilities, Derecognition, ASC 405-20-40-1 states the following:
  
  A debtor shall derecognize a liability if and only if it has been extinguished. A liability has been extinguished if either of the following conditions are met:
  1. The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes the following:
     1. Delivery of cash
     2. Delivery of other financial assets
     3. Delivery of goods or services
     4. Reacquisition by the debtor of its outstanding debt securities whether the securities are cancelled or held as so-called treasury bonds.
  2. The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor.

• Therefore, based on the above excerpt, the organization should not recognize in the income statement any ‘gain from extinguishment of debt’ until the entity has been legally released as the primary obligor under the loan. As it currently stands, it appears the organization would not be legally released from being the primary obligor under the loan until all the loan forgiveness conditions have been met and the entity receives confirmation from the lender or Small Business Administration (SBA) verifying the amount that is forgiven.
• As noted above, the confirmation of loan forgiveness goes through the lender and the SBA, and no guidance has currently come out to address from a legal perspective if the confirmation is after the lender or both the lender and the SBA confirm forgiveness (the hope is that answer will evolve as organizations begin to apply for forgiveness). Regardless, confirmation will be ‘date specific’, meaning nothing can be recognized until the date of confirmation of that forgiveness.
• What we are currently hearing is that if forgiveness confirmation doesn’t come until after the fiscal year end of the organization, that this will be a ‘Nonrecognized Subsequent Event’. What this means is if you meet all of the criteria to apply for forgiveness before your organizations fiscal year end,  you will not recognize the gain until the specific date of confirmation of the forgiveness.
• Example: an organization applied and received proceeds under a PPP loan in May of 2020; the organization has a fiscal year end of September 30, 2020; eligible expenses were incurred under the PPP loan guidance and forgiveness was applied for before the end of the fiscal year end; the organization receives confirmation notice on November 15, 2020 by the lender or SBA that the loan will be forgiven; audited financial statements will be issued on November 30, 2020. In this situation, while the criteria were all met and forgiveness was applied for before the fiscal year end, the ‘specific date’ of confirmation denoting ‘legal release’ was received after fiscal year end; this would be a nonrecognized event, and would not be recognized in the September 30, 2020 financial statements as a gain, but would be disclosed as a subsequent event in the footnotes. The organization could also choose to include in the subsequent event footnote pro forma income with the forgiveness taken into account.

Keep in mind that the above is just one scenario, and depending on your organizations circumstances, including fiscal year end, timing of application and confirmation for forgiveness, as well as if your organization treats the PPP loan as debt under ASC 470, the treatment may vary.

Also, we recommend that if your organization has covenants, bonding, etc., that you take that into consideration now, and talk to the users of the financial statements on the treatment of the debt. Please contact us with any questions.