By Colin Hannifin, CPA, Business Assurance & Advisory Services Manager
Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was passed into law in March 2020, which launched the Paycheck Protection Program (the PPP). Since the program was launched, billions of dollars have been borrowed by entities across the United States with the expectation that most of it will be forgiven. While the focus has been justifiably on accessing and utilizing these resources, as the program matures, many entities are beginning the process of applying for debt forgiveness. Questions have persisted, however, on the appropriate way to record the loan and subsequent forgiveness.
On Wednesday, June 10, 2020, the AICPA issued Technical Question and Answer 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program (the Q&A). The Q&A affirms that, under current generally accepted accounting principles (GAAP), there are primarily two potential approaches:
- Treating the funds as debt, recording a liability until such time the debt is forgiven or repaid; or
- Treating the funds as a governmental grant.
The most conservative treatment is to account for any PPP loans as debt, in accordance with Accounting Standards Codification (ASC) 470, Debt. Under this treatment, entities would record the PPP loan as a debt liability, accruing interest in accordance with the loan agreement. The loan is then carried as a liability until such time that it is forgiven, repaid, or some combination thereof. If the loan is forgiven, the liability will be removed and a gain on extinguishment is recognized.
If an entity believes that the loans essentially represented a purpose-restricted grant, it can account for them as such; however, the treatment will vary depending whether the entity is a not-for-profit organization or a for-profit entity.
A not-for-profit organization can utilize the guidance of ASC 958-605, which provides guidance on recognizing revenue specific to not-for-profit organizations. Under this guidance, the loan would be accounted for as other purpose-restricted grants. It would be recognized initially as a liability – a refundable advance – but recognized as revenue as the conditions for its use are met (that is, as the funds are used in accordance with PPP guidelines).
Unfortunately, GAAP does not currently have any guidance on how for-profit entities should account for governmental aid. In these situations, GAAP calls on entities to determine the appropriate treatment by analogizing the facts and circumstances to authoritative guidance. As the Q&A notes, for-profit entities have a few different options when considering which guidance to analogize:
- As noted above, ASC 958-605, which provides not-for-profit organizations guidance on how to account for revenue from governmental sources (in addition to other sources).
- ASC 450-30, which provides guidance around gain contingencies, and states that recognition of a gain is appropriate when all contingencies have been met and the funds are realized or realizable. Until such time, the funds would be recorded as a liability.
- International Accounting Standards (IAS) 20, which notes that governmental assistance can be recognized once there is reasonable assurance that the conditions attached to the assistance will be met and the assistance will be met. The earnings should be recognized systematically over the period in which the related expenses are incurred and recorded.
Existing guidance provides entities numerous options on how to account for PPP loans. The most appropriate course of action will likely depend on the facts and circumstances that each entity faces. Consistently among the various options, if there is doubt about whether the loan will be forgiven, it should be reported as a liability.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.