You’ve received a forgivable loan under the Small Business Administration Paycheck Protection Program (PPP). How do you now recognize these funds in your accounting? Even though PPP loans are technically debt, many would say that the loan is essentially a government grant. Fortunately, the American Institute of Certified Public Accountants (AICPA) just issued guidance on how non-governmental entities (i.e. businesses and not-for-profit entities) may account for their PPP loans.
According to new guidelines for borrowers published Wednesday, non-governmental entities may recognize PPP program loans as a financial liability in accordance with FASB ASC Topic 470, Debt, or other models, if certain conditions are met. These conditions are outlined in the AICPA’s Technical Question and Answer (TQA) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program. The TQA describes that an entity accounting for its PPP loan under Topic 470 would do the following:
- Initially record funds received from the PPP loan as a financial liability and would bear interest in accordance with the interest method under FASB ASC 835-30.
- Would not assign additional interest at the market rate.
- Continue to record proceeds as a liability until either (1) the loan is, in part or entirely, forgiven and the debtor has received a legal release and (2) the debtor pays off the loan.
- Reduce the liability by the amount forgiven and record a gain on the extinguishment.
According to FASB ASC 105-10-05-2, when there isn’t explicit guidance, entities should analogize a scenario to other areas of authoritative generally accepted accounting principles. As explained in the TQA, a business entity that expects to meet the PPP’s eligibility criteria and concludes that the PPP loan it was granted is expected to be forgiven, may analogize to IAS 20 to account for the PPP loan. IAS 20, which outlines a framework of accounting for government assistance such as forgivable loans, provides that government assistance is not recognized until there is reasonable assurance that (1) any conditions on the assistance will be met, and (2) the assistance will be received. Under this framework, once there is reasonable assurance that the conditions of a PPP loan will be met, the impact of the funds received is 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.” See Paragraph 12, IAS 20. Alternatively, where the PPP’s eligibility criteria are expected to be satisfied and forgiveness granted, a business entity may also analogize to guidance in FASB ASC 9850605 or ASC 450-30. More information on these accounting topics can be found on a table included in the TQA, here.
Forgivable loans under the PPP program are available for businesses with less than 500 employees and in operation on February 15, 2020. The PPP loan application went live on April 3, 2020 and has distributed hundreds of billions of funds to businesses so far. Businesses receiving forgivable PPP loans should be sure to adequately disclose their accounting policy pertaining to these loans, and their impacts on their financial statements.
If you have any questions about the PPP program, please contact RLG Attorney Omar Abdallah at firstname.lastname@example.org.