On June 9, 2020, the AICPA issued Technical Question and Answer (TQA) 3200.18 in conjunction with the Financial Accounting Standards Board (FASB) summarizing their responses relating to Paycheck Protection Program (PPP) loan accounting technical inquiries.
PPP loans were made available through Congress’ passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act in March of 2020. PPP loans are Small Business Administration (SBA) loans available to small businesses (less than 500 employees) in operation as of February 15, 2020. PPP loans are also available to not-for-profit organizations and certain businesses with more than 500 employees.
The crux of the uncertainty surrounding PPP loan reporting is whether to account for PPP loans as debt or as a government grant due to the PPP loan representing, in substance, a grant expected to be forgiven for certain entities expecting to meet the forgiveness eligibility criteria.
Summarized in the TQA are the multiple accounting alternatives under which PPP loans can be accounted for by business entities. PPP loans are permitted to be accounted for as follows:
- Financial liability in accordance with FASB ASC 470, Debt
- By analogy to International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance
- Government grant in accordance with FASB ASC 958-605, Not-for-Profit (NFP) Entities: Revenue Recognition
- Gain contingency in accordance with FASB ASC 450-30
If your company elects to account for the loan as a liability under ASC 470 shall account for the loan as follows:
- The initial receipt of PPP funds shall be recorded as a financial liability with interest accruing in accordance with FASB ASC 835
- Despite the PPP Loan interest rate of 1% being below the market rate available to businesses, it is a government-prescribed rate and as such, is exempt from the imputed interest requirements of FASB ASC 835.
- The loan shall be reported in full as a liability until such time that you have either paid off the loan or have been forgiven for the loan, either in part or in full.
- If the loan is forgiven, either wholly or partially, the recorded liability shall be reduced by the amount forgiven. This amount shall be recognized as a gain on extinguishment of debt.
If your company expects to satisfy PPP loan forgiveness criteria and concludes that the PPP loan represents a government grant expected to be forgiven, you may elect to account for the loan in a manner analogous to IAS 20. Under this treatment, you will recognize the earnings impact of the PPP funds as related expenses for which your company is receiving assistance are incurred. It’s important to note that under this treatment, the earnings impact shall only be recognized once reasonable assurance is obtained that all conditions requisite to receipt of the assistance (forgiveness criteria) are met. Reasonable assurance is similar to the “probable” threshold in U.S. GAAP.
If your company expects to meet PPP eligibility criteria and concludes that the loan represents a government grant, you may account for the loan in accordance with FASB ASC 958-605. Under this guidance, you would initially record the PPP loan as a refundable advance. You would then reduce the refundable advance and recognize the contribution once the conditions of release have been substantially met or explicitly waived.
Lastly, if the above criteria are met, you may alternatively elect to account for the loan as a gain contingency in accordance with FASB ASC 450-30, where you would record the PPP loan as a liability. This would remain as a liability until the grant proceeds are realized or realizable, at which time the earnings impact would be recognized.
In summary, how to account for a PPP loan is an accounting policy election your company must make based upon the facts and circumstances surrounding your PPP loan. Disclosure of this accounting policy will need to be included within any issued financial statements that you provide to third parties.