Jan 15, 2021
Over the past several weeks’ companies have started to receive notification of forgiveness of their PPP loans. As you begin to think about how you will account for your loan and forgiveness, it is important to remember proper GAAP accounting. As we noted in our prior blog, Accounting for PPP Loan Proceeds, the legal form of a PPP loan is debt. However, the PPP loan does include a forgiveness component which under certain scenarios permits treating the proceeds as a grant and following IAS 20 Accounting for Government Grants as an option. To be treated as a grant, the proceeds must be reasonably assured they will comply with the eligibility and forgiveness requirements. The biggest difference between the two options is under grant accounting, the income is recognized as the costs are incurred and for debt accounting, the gain is recognized when the entity is notified of forgiveness.
PPP loans should be derecognized when the debt is extinguished, in accordance with the guidance in ASC 405-20, Liabilities: Extinguishments of Liabilities. Under this guidance, debt is extinguished when either the debtor pays the creditor, or the debtor is legally released from being the primary obligator. As a result, when treating the PPP loan proceeds as debt you recognize the income in the year the company is notified of forgiveness. For any business with a 12/31 year-end who receive notification after such, even if the financial statements have not been issued, the gain should be recognized in 2021. If a company wants to recognize the gain during the fiscal year 2020 they should consider grant accounting.
Each borrower under the PPP program should carefully analyze its unique facts and circumstances in determining the appropriate accounting. Regardless of the accounting approach followed by a borrower they should disclose in the footnotes how the PPP loan was accounted for and where the related amounts are presented in the financial statements. Should you have questions about your specific situation, please contact your William Vaughan Company advisor or reach out to our contributor, Juli Seiwert in our firm’s audit department.
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Juli Seiwert, CPA
Audit Senior Manager, William Vaughan Company
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Jul 20, 2020
Many businesses have received Paycheck Protection Program (PPP) loans and are now asking the question, “How do I account for the proceeds and potential forgiveness related to the PPP loan?”
The legal form of a PPP loan is debt, and regardless of the expectation of forgiveness, following the guidance under ASC 470, Debt will always be an appropriate option. However, the PPP loan does include a forgiveness component, resulting in many businesses wondering if the funds could be recorded as a grant. Currently, U.S. GAAP does not contain specific guidance on how business entities should account for government assistance. The AICPA has suggested that businesses can reference other guidance such as International Accounting Standard (IAS) 20 as an accounting framework for forgivable loans. A not-for-profit entity that received a government grant should apply ASC 958-605.
How does accounting work under both scenarios?
In accordance with ASC 470 Debt, upon receipt of the funds, a liability should be recognized for the full amount and will generally be classified as a long-term liability. Interest should be accrued at 1% beginning on the date the loan was received and continue over the term of the loan.
Any amount that is forgiven and the entity is legally released from its obligation, would be recognized as a gain in the income statement as an extinguishment of debt. This includes any interest which is forgiven.
Receipt of the loan proceeds and any repayment, the Company would present as financing activities. Any funds that are ultimately forgiven would be disclosed as a noncash finance activity. Interest paid should be presented as a cash outflow from operating activities.
The disclosures in the financial statements, at a minimum, should indicate the accounting treatment, terms of the agreement, and where the loan amounts are recorded in the financial statements, similar to other debt.
For those entities that are reasonably assured that they will comply with the eligibility and forgiveness criteria for the full loan, grant accounting could be an appropriate option. These entities should consider the guidance under IAS 20.
Upon receipt of the forgivable loan, a short-term liability for deferred income should be recognized. As the entity incurs the eligible expenses, the income should be recognized and the liability should be reduced.
In accordance with IAS 20, grant income can be presented as a credit in the income statement either as a reduction to the related expenses or it can be presented in other income.
Grant proceeds received, that are expected to be forgiven, should be presented as operating activities in the cash flows statement.
The disclosures in the financial statements should indicate the accounting policies applied, such as funds received, amounts included in both deferred income and recognized in income during the period, how deferred amounts will be recognized, and any unfulfilled conditions. The disclosure should also reference where the loan amounts are recorded in the financial statements.
If an entity does not anticipate meeting the PPP eligibility and loan forgiveness criteria, the loan should be accounted for as debt. In certain scenarios, in which the entity is reasonably assured of meeting the loan eligibility and forgiveness criteria for the full loan, it may be appropriate to account for the proceeds as a government grant. Whatever option the entity decides to follow, the financial statement disclosures should be straight-forward and inclusive.
The SBA has indicated it intends to issue additional guidance to help address questions from borrowers and lenders. All entities that received a PPP loan should continue to monitor for any developments which could impact their accounting for the loan. Should you have questions about your specific situation, please contact your William Vaughan Company advisor or reach out to our contributor, Juli Seiwert in our firm’s audit department.
Juli Seiwert, CPA