The American Institute of Certified Public Accountants (AICPA) has provided interpretive guidance on how nongovernmental entities should account for forgivable loans received through the Small Business Administration’s (SBA) Paycheck Protection Program (PPP). The U.S. Securities and Exchange Commission has indicated that they will also permit these accounting methods for PPP loans.
Nongovernmental entities may account for the financial liability under Financial Accounting Standards Board’s (FASB) Accounting Standard Codification (ASC) 470, Debt, and accrue interest according to ASC-835-30, Imputation of Interest. As government obligations, loans received through the PPP are excluded from calculating additional imputed interest on loans with interest below market rates. Borrowers should reference the guidance at FASB ASC 405-20, Extinguishments of Liabilities, for treatment of the loan liability. At 405-20-40-1, the proceeds from the loan should remain as a liability until either of the following are met:
The loan is fully or partially forgiven and the debtor has received legal release from the liability; or
The liability is paid off by the debtor to the creditor.
If the loan is fully forgiven or forgiven in part and legal release is received, the nongovernmental entity would then reduce the liability for the amount of the forgiveness at the forgiveness date by recording a gain on extinguishment.
Borrowers that are for-profit entities may also choose to account for the PPP loans under International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, issued under International Financial Reporting Standards (IFRS). Under IAS 20, government assistance is not recognized until there is a reasonable assurance (similar to FASB’s “probable” threshold) that the conditions attached to the assistance will be met and the governmental assistance will be received. Once entities have reasonable assurance that these conditions will be met, earnings from the governmental grant should be recorded as the related costs, such as compensation, are incurred. Entities should record the cash received from the loan as a deferred liability. The liability would then be reduced with a credit to other income or as a reduction of the related expenses covered by the PPP loan.
Not-for-profit entities that elect not to follow ASC 470 may account for PPP loans in accordance with ASC 958-605, Revenue Recognition, as a conditional grant. While, 958-605 generally excludes contributions made by governmental entities to for-profit entities, FASB is permitting for-profit entities to elect to treat PPP loans under this guidance. Under 958-605, the timing of recognition for a received contribution depends on whether the contribution is conditional. When conditional, the amount of loan forgiveness should not be recognized until conditions are substantially met or have been waived by the grantor. Under this method, the cash received should be recorded as a refundable advance and then recognized once conditions are met or explicitly waived.
For-profit entities are also permitted to account for the PPP loans under ASC 450-30, Gain Contingencies. Under this method, funds received under the loan would be recorded as a liability with a gain contingency recognized when all conditions of loan forgiveness are met.
In summary, for-profit and non-profit entities may follow ASC 470 under all circumstances. If a for-profit entity believes they will met PPP’s eligibility criteria for forgiveness will be met they may choose to follow IAS 20, ASC 958-605, or ASC 450-30. Non-profit entities may also follow ASC 958-605 if they believe the loan is a grant that is expected to be forgiven. All nongovernmental entities with material PPP loans should include accounting policy disclosures and the impact of the loans on their financial statements.
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