Accounting for Paycheck Protection Loans
Many entities have received benefits from the U.S. Small Business Administration’s (SBA) Paycheck Protection Program (PPP), but this relief raises accounting challenges because its legal form is debt, but it is conditionally forgivable. Existing accounting guidance addresses government assistance received by not-for-profit (NFP) entities, but there is no guidance covering for-profit entities.
For governmental entities, GASB has issued a proposal to address accounting for COVID-19 relief. GASB is scheduled to meet on June 30, 2020, to review comment letter feedback, and a final technical bulletin should be released shortly thereafter (see BKD article GASB Proposal Clarifies COVID Accounting).
NFP organizations can look to Accounting Standards Update 2018-08, Not-for-Profit Entities (Topic 958), Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (see New NFP Guidance – Contribution or Exchange Transaction?).
In consultation with the SEC and FASB, the American Institute of CPAs issued a Technical Q&A (nonauthoritative guidance) addressing PPP accounting issues for borrowers. A business entity may choose from several models with appropriate disclosure:
- Topic 470, Debt; Subtopic 405-20, Liabilities—Extinguishments of Liabilities. Regardless of whether a nongovernmental entity (NFP or for-profit entity) expects to repay the PPP loan or expects it to be forgiven, an entity may account for the loan as a financial liability. Under Accounting Standards Codification (ASC) 405, the loan would remain a liability until it is forgiven and the debtor has been legally released or the debtor repays the loan. If the loan is forgiven, the entity would reduce the liability by the amount forgiven and record a gain on extinguishment. An entity would accrue interest in accordance with the interest method under FASB ASC 835-30. Although the PPP interest rate is below market rate, an entity would not impute additional interest at a market rate because transactions where interest rates are prescribed by governmental agencies (in this case, the SBA) are specifically excluded from ASC 835-30’s guidance on imputing interest.
- International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance (by analogy). Under this model, governmental assistance is not recognized until there is reasonable assurance—similar to “probable” under U.S. generally accepted accounting principles (GAAP)—that any conditions attached to the assistance will be met and the assistance will be received. A business entity would record the cash inflow from the PPP loan as a deferred income liability. Once there is reasonable assurance that the conditions will be met, a business entity would reduce the liability, with the offset through earnings, as it recognizes the related cost to which the loan relates, e.g., compensation expense.
- Subtopic 958-605, Not-for-Profit Entities—Revenue Recognition (by analogy). While this guidance excludes governmental contributions to for-profit entities, FASB acknowledged in recent meetings that such entities are not precluded from applying it by analogy. Under this model, the timing of recognition for a contribution received depends on whether the contribution is conditional or not. If conditional, the contribution is not recognized until the conditions are substantially met or conditionally waived. A company would record the cash inflow from the PPP loan as a refundable advance. Once the conditions of release have been substantially met or explicitly waived, the company would reduce the advance and recognize the contribution (see New NFP Guidance – Contribution or Exchange Transaction?).
- Subtopic 450-30, Contingencies—Gain Contingencies (by analogy). Under this model, the earnings impact of a gain contingency is recognized when all the contingencies related to the receipt of assistance have been met and the gain is realized or realizable. An entity should initially record the cash inflow from a PPP loan as a liability until the grant proceeds are realized or realizable at which time the earnings impact would be recognized.
If an NFP chooses not to follow ASC 470 and it expects to meet the PPP’s forgiveness criteria, e.g., treating the receipt as a grant, it should follow conditional contribution guidance in ASC 958-605.
Disclosures of Significant Accounting Policies
Topic 235, Notes to Financial Statements, requires disclosures of significant accounting policies:
- Entities are required to identify and describe the accounting principals that materially affect financial statements.
- Disclosures generally include judgment as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods. In particular:
- A selection from existing acceptable alternatives
- Principles and methods peculiar to the industry in which the entity operates
- Unusual or innovative applications of GAAP
All nongovernmental entities should disclose their accounting policy election for PPP loans and describe the effect on the financial statements.
BKD will continue to follow this developing situation. Visit BKD’s SBA Loan Resource Center to learn more. If you have questions about these changes, contact your BKD Trusted Advisor™ today.