Accounting for the Paycheck Protection Program (PPP) Proceeds and Forgiveness
General Information about PPP Loans
PPP loans are administered by the Small Business Administration (SBA) and are disbursed by banks, for potentially forgivable loans to support eligible small business impacted by COVID-19. The loans have a two or five-year term (depending on when they were issued) and bear interest at 1 percent. The PPP 1 was closed to additional small business applicants on August 8, 2020. The Economic Aid Act rebooted the PPP with many of the same parameters as the first program but also several important differences from the original PPP.
Other key points:
- There is no U.S. GAAP guidance for for-profit business entities that receive government grants that are not in the form of a tax credit or revenue from a contract with a customer.
- Nongovernmental entities with material PPP loans should adequately disclose their accounting policy for such loans and the related impact to the financial statements.
- Business entities will need to establish a new accounting policy for accounting for government grants if they do not have an established policy.
- PPP loans disbursed by banks are not subject to single audit; however, loans made under the Economic Injury Disaster Loans (EIDL) are subject to the Uniform Guidance single audit requirements.
Accounting for PPP Proceeds and Forgiveness: Consist of 4 Options Primarily
Apply the following 4 options to public, private, and not-for-profit entities:
Option 1: Loan
The legal form of a PPP loan is debt; therefore, it is appropriate for an entity that receives such a loan to account for it as debt under Accounting Standards Codification (ASC 470), regardless of whether the entity expects the loan to be forgiven.
Under ASC 470, an entity would recognize a liability for the full amount of PPP proceeds received and accrue interest over the term of the loan. Any amount that is ultimately forgiven (i.e., the debtor pays the creditor or the debtor is legally released from being the loan’s primary obligor in accordance with ASC 405-20-40), would result in recognizing income from the extinguishment of the liability in the income statement as a gain on loan extinguishment at the time the debt is forgiven or paid off.
For cash flow purposes, any amounts forgiven according to this option should be disclosed as a noncash financing activity. Entities that account for PPP proceeds as debt should consider the disclosure requirements in ASC 470-10-50.
Summary: If accounting for the PPP Loan and forgiveness following US GAAP guidance for debt (ASC 470):
- Recognize the liability and accrue interest according to loan terms.
- Any amount forgiven is recorded as gain from extinguishment/forgiveness of debt once legally released from being the primary obligor.
- Gain from forgiveness is presented on its own line in the income statement as other income or operating income (since location is not specified by US GAAP).
- Cash flow treatment: receipt of the PPP loan proceeds would be recorded as cash from financing activities and any amounts forgiven would be disclosed as a noncash financing activity.
Accounting for the receipt of PPP forgiveness is rather straight forward and should include a debit to PPP loan and a credit to a revenue account, as follows:
Option 2: Government Grant (IFRS model)
An entity may account for the forgivable PPP loan as, in substance, a government grant that is earned if the entity is compliant with the PPP eligibility and loan forgiveness criteria. Accordingly, business entities will need to determine the appropriate accounting treatment analogous to other guidance since US GAAP is not available (i.e., IAS 20). International Accounting Standards (IAS) 20, the IFRS accounting standard on accounting for government grants, includes an accounting framework for forgivable loans. Other analogous guidance for contributions received by not-for-profits is ASC 958-605 (see Option 3).
Under this option, PPP proceeds received would be accounted for as an income grant. A deferred income liability would be recognized when forgivable loan proceeds are first received, if the entity determined that there is “reasonable assurance” that it will meet the conditions for forgiveness of the entire loan amount. The deferred income liability would be recognized in income on a systematic and rational basis over the periods in which the entity incurs the eligible expenses to which the grant relates.
If an entity elects to account for PPP proceeds as a government grant it will need to continually reassess its ability to meet the complete forgiveness conditions. If the entity can no longer support a conclusion that it expects to meet the conditions, it may have to reverse income which has previously been recognized.
Summary: If accounting for the PPP Loan and forgiveness following government grant IFRS model (IAS 20):
- Recognize the deferred income liability.
- Recognize income and relieve deferred income liability on a systematic and rational basis according to recognition of eligible expenses.
- Continually reassess ability for complete forgiveness; potentially reverse income if forgiveness conditions are not met.
The deferred income liability would be reduced, and income would get recorded on a systematic and rational basis over the periods in which the entity incurs the eligible expenses to which the grant relates, i.e. forgiveness of $50,000 of eligible expenses in one month would be recorded as follows:
Option 3: Government Grant (FASB model) – Not-for-profit
If a not-for-profit (NFP) entity expects to meet the PPP’s eligibility criteria and chooses not to follow FASB ASC 470 and if the NFP concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it should account for such PPP loan as a conditional contribution (refundable advance) in accordance with FASB ASC 958-605. If contributions are conditional, the contribution is not recognized until the conditions are substantially met or explicitly waived.
The scope of FASB ASC 958-605 excludes contributions made by governmental entities to business (for-profit) entities; however, the FASB staff has acknowledged that entities scoped out of that guidance are not precluded from applying it by analogy when appropriate. Therefore, in accordance with ASC 958-605 the timing of recognition for a contribution received will depend on whether the contribution is conditional or not.
Summary: If a not-for-profit entity chooses to account for the PPP Loan and forgiveness as a conditional contribution (in substance, government grant) following ASC 958-605:
- Recognize the proceeds as a refundable advance (liability).
- Reduce the refundable advance and recognize contribution revenue once the conditions of release have been substantially met or explicitly waived.
A $25,000 refundable advance would be recognized as contribution revenue once the conditions of the release have been substantially met or explicitly waived.
Option 4: Gain Contingency Model
A business entity may record the PPP loan analogous with gain contingency guidance (FASB ASC 450-30). Under the gain contingency model, the earnings impact of a gain contingency is recognized when all the contingencies related to receipt of the assistance have been met and the gain is realized or realizable. As applied to forgivable loans received under the PPP, a business entity would initially record the cash inflow from the PPP loan as a liability. The proceeds from the loan would remain recorded as a liability until the grant proceeds are realized or realizable, at which time the earnings impact would be recognized.
Summary: If an entity chooses to account for the PPP Loan and forgiveness as a gain contingency following ASC 450-30:
- Proceeds would be recorded as a liability until the gain is realized or realizable.
- A contingency that might result in a gain usually should not be reflected in the financial statements because to do so might be to recognize revenue before its realization – ASC 450-30-25.
A $75,000 gain contingency would be recognized as revenue once the gain is realized or realizable. However, caution is advised in recording the contingency since it might be to recognize revenue before its realization.
Accounting Acronym Definitions:
ASC – In US accounting practices, the Accounting Standards Codification (ASC) is the current single source of United States Generally Accepted Accounting Principles (GAAP). It is maintained by the Financial Accounting Standards Board (FASB).
FASB – The Financial Accounting Standards Board (FASB) is an independent nonprofit organization responsible for establishing accounting and financial reporting standards for companies and nonprofit organizations in the United States, following generally accepted accounting principles (GAAP).
GAAP – Generally accepted accounting principles (GAAP) refer to a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB).
IAS – International Accounting Standards (IAS) are older accounting standards issued by the International Accounting Standards Board (IASB), an independent international standard-setting body based in London. The IAS were replaced in 2001 by International Financial Reporting Standards (IFRS).
IFRS – International Financial Reporting Standards (IFRS) set common rules so that financial statements can be consistent, transparent, and comparable around the world. IFRS are issued by the International Accounting Standards Board (IASB).