The AICPA recently updated a technical accounting guide that provides accounting options to borrowers of the Paycheck Protection Program (PPP) Loan. The guide is in the form of a Technical Question and Answers (TQAs) (TQA 3200.18). A TQA is nonauthoritative but they can be helpful in answering questions that arise in certain areas of accounting.
The PPP loan is very unique funding and some believe that the loan is, in substance, a government grant. Regardless of whether the borrower expects to repay the PPP loan or believes it is expected to be forgiven, it may account for the loan as a financial liability and accrue interest. The borrower would not impute additional interest at a market rate (even though the stated interest rate may be below market) however.
The TQA 3200.18 provides options on how to account for the PPP loan for businesses (for profit entities) and not-for-profit entities. Based on the extension of the covered period up to 24 weeks at the option of the borrower, the forgiveness may end up being completed in 2021, which would then lead to the borrower having to decide how it should account for the PPP loan at their reporting periods during the interim or at year end of December 31, 2020. The accounting decision would be important to users of the entity’s financial statements. Furthermore, material PPP loans should be adequately disclosed in entity financial statements with providing the accounting policy of the PPP loans and the related impact.
The following are accounting options for the PPP loan:
Business entities (for Profit entities)
- Record as debt and continue to record the proceeds of the loan as a debt liability until either (1) the loan is partly or wholly forgiven and the borrower has been legally released (forgiveness formally approved) or (2) the borrower pays off the loan. Once the forgiveness is approved the borrower would reduce the liability and record a gain on extinguishment.
- Record as a deferred income liability and once there is reasonable assurance (probable) that the PPP proceeds will be forgiven record the earnings impact on a systematic basis over the periods in which the entity recognizes the qualifying expenses to which the PPP loan relates and either record “other income” or net these amounts with the related expense (for example, compensation expense).
- Record as a refundable advance liability and once there is reasonable assurance (probable) that the PPP proceeds will be forgiven record the earnings impact on a systematic basis over the periods in which the entity recognizes the qualifying expenses to which the PPP loan relates and record “other income” or similar miscellaneous income.
Not-For-Profit entities
- Record as debt and continue to record the proceeds of the loan as a debt liability until either (1) the loan is partly or wholly forgiven and the borrower has been legally released (forgiveness formally approved) or (2) the borrower pays off the loan. Once the forgiveness is approved the borrower would reduce the liability and record a gain on extinguishment.
- Record as a refundable advance liability and once there is reasonable assurance (probable) that the PPP proceeds will be forgiven record the earnings impact on a systematic basis over the periods in which the entity recognizes the qualifying expenses to which the PPP loan relates and record grant/contribution income. This accounting is in accordance with the contribution recognition model and the PPP loan is treated as a conditional contribution until the conditions are met (conditions of release have been substantially met or explicitly waived).
If you need assistance with understanding the accounting of PPP loans, please contact your HW&Co. advisor.
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