In the ever-changing environment of government assistance and regulation, change is the one constant. The Payroll Protection Program (PPP) loans and their forgiveness are no exception. The general guidance from General Accepted Accounting Principles (GAAP) has not changed; however, more resources from the accounting profession have been published that clarify interpretations for the proper accounting for PPP loan forgiveness.
Here are a few common questions and scenarios we’ve received.
How Should a Nongovernmental Entity Account for a Forgivable Loan Received Under PPP?
The American Institute of Certified Public Accountants released a Technical Question and Answer (TQA) under Section 3200, Long‐Term Debt asking the question, “How should a nongovernmental entity account for a forgivable loan received under the Small Business Administration Paycheck Protection Program (PPP)?”
Based on review of the TQA, the most appropriate method for accounting for PPP forgivable loans is for a business entity to follow the guidance under FASB ASC 405‐20 Liabilities: Extinguishment of Liabilities and for a nonprofit entity to follow the guidance under ASC 958‐605 Not‐for‐Profit Entities: Revenue Recognition.
Under both pieces of guidance and due to the complexity of the loan provisions and forgiveness process, it is unlikely that an entity will recognize forgiveness of the PPP loan until forgiveness is officially provided by the lender. Additionally, income from the forgiveness should most likely be recognized at the time the forgiveness is provided and not recognized as a subsequent event if the forgiveness amount is provided after year‐end but prior to the issuance of the year‐end financial statements. You can find a copy of the TQA here.
What Should I Consider When it Comes to Presentation and Recognition?
Balance Sheet (Statement of Financial Position) Presentation
- With the material nature of the PPP loan, it is encouraged to present the loan (or refundable advance for a nonprofit) balance separately within the liabilities section of the balance sheet.
- Consideration of classification of a short‐term or long‐term liability should be made for any portion of a loan that is (or is expected) to be repaid. If the borrower applied for forgiveness, the payment deferral period ends (that is payments are required to begin) on the date the SBA remits final forgiveness or partial forgiveness to the lender. If the borrower didn't apply for forgiveness, the payment deferral period ends 10 months after the end of the borrowers loan forgiveness covered period. A portion that is eventually expected to be repaid, but not required to be repaid in the next year may be classified as long-term. The portion that is expected to be forgiven within the next year would be classified as short-term.
- Entities recording the PPP loan under ASC 470 - Debt should consider the impact on the financial statements of accrued interest. Interest begins accruing at time of origination. Accrued interest associated with forgiven principal will be included in the forgiveness.
Income Statement (Statement of Activities) Presentation
- Forgiveness, whether recorded as a contribution under ASC 958‐605 or as an extinguishment of debt under ASC 405‐20, should be separately presented in the income statement if amounts are material.
- Netting of the forgiveness with the expenses incurred to obtain the forgiveness is not encouraged because GAAP generally does not permit net presentation in financial statements.
- There may be diversity in practice regarding classification of the forgiveness income in the income statement. If nonprofit guidance is followed, the amount will be presented as contribution revenue in the statement of activities and may be classified as operating or nonoperating income depending on the entity’s identification of what is included or excluded from its intermediate measure of operations. If debt extinguishment guidance is followed under ASC 405‐20, presentation as a separate line item within operating income or within other income is appropriate.
Footnote Disclosure
The footnote disclosures should include, but are not limited to:
- Description of the PPP loan and amount awarded from the program.
- Accounting policy disclosure should include the accounting method followed to record the original loan and to recognize the loan forgiveness.
- The amount of the loan forgiven and amount that was not forgiven and will be repaid.
- The terms of repayment of the loan including expected repayment dates and interest rates.
Make sure you’re properly accounting for PPP funding.
We continue to receive guidance surrounding PPP treatment and how to account for PPP loans. Below you will find original guidance (as of April 2020) that is still in play related to accounting for PPP funding and subsequent loan forgiveness.
How and When Should the Loan Forgiveness Be Recorded in the Financial Statements?
Nonprofits
There is specific guidance to follow on the topic within ASC 958 related to exchange and nonexchange transactions. When considered to be an exchange transaction, ASC 606 will be followed and if determined to be non-exchange, ASC 958-605 for contributions will be followed.
In the case of the PPP loans, the government appears to provide the funds “without the intent of exchanging goods or services of commensurate value” and had “full discretion in determining the amount.” Therefore, it would appear these are nonexchange transactions and accounted for as contributions under ASC 958-605.
Nonprofit entities should recognize that the portion of the loan that will be forgiven is dependent on certain future events occurring, which represents a barrier in the agreement resulting in a conditional contribution that should not be recognized until the barrier has been overcome.
Business Entities
We are in unprecedented times. Since there is no explicit guidance for business entities within GAAP for a government loan that may be fogiven, businesses should instead look to guidance that is reasonably applicable in regard to treatment of PPP loans.
- ASC 450-30: Gain Contingencies - The forgiveness would not be recognized until it is realized, meaning the final forgiveness amount has been determined and forgiveness issued by the government.
- ASC 470: Debt - This may also be applied because it is a loan from the government that created an obligation to be repaid unless certain criteria are met. In the case of a PPP loan, organizations must use funding for rehiring or retaining employees and using the funds for the payroll expense or certain other business expenses. When the company is legally released from the debt, or forgiveness is granted, the extinguishment would be recognized into income as a separate item.
- IAS 20, Accounting for Government Grants and Disclosure of Government Assistance - This guidance has been applied in many situations with the lack of specific guidance within ASC for government grants.
“A forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.”IAS 20 Paragraph 10
The PPP loans require the funds to be used for payroll and other certain expenses. Therefore, the company would incur costs to comply with the grant over the applicable covered period. Under IAS 20, the entity could recognize the forgiveness over the period the entity incurs the costs based on IAS 20 paragraph 12:
“Government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate.”
Under this international guidance, the income will be accelerated compared to a contingent gain approach. Careful consideration should be made when applying the IAS guidance for a period in which the grant period crosses year-end because income would be recognized in a period and not fully realized until the following period, and could potentially lead to a reversal of income.
If this practice is followed, an analysis should be completed of compliance with the applicable requirements of the PPP loan and calculation of the amount of expenses incurred that will be forgiven. In addition, disclosure should be included to describe the method used to determine the forgiveness estimate and the actual results could differ once the final settlement is known.
Where Should the Loan Forgiveness Be Classified in the Statement of Operations?
An argument could be made that it constitutes an event that is unusual in nature and indicates an infrequency of occurrence. Under ASC 220-20-45, the costs and income would then be presented as separate components of income.
Consideration of the costs and income to be recorded would likely include items that are directly related to the disruption caused by COVID-19. This may include:
- Incremental costs that would not otherwise be incurred
- Asset impairment
- Business interruption insurance recoveries
- PPP loan forgiveness
Nonprofit entities could apply similar treatment in their Statement of Activities. International guidance related to government grants states that the income would be presented “either separately or under a general heading such as ‘other income’; alternatively, they are deducted in reporting the related expense.”
Generally, offsetting is not a preferable method of presentation and would require additional disclosure in the footnote to describe the effect on any line items effected in the income statement. In addition, the loan forgiveness is likely to be material and separate presentation is preferable.
Loan forgiveness classification as operating or nonoperating requires judgment, and consideration should be made with how the funds are used.
Where Should the Loan Forgiveness Be Classified in the Statement of Cash Flows?
The classification within the statement of cash flows requires some judgment, and determination might include consideration of how the funds will be used. Since the PPP loan is a forgivable loan, an entity following the guidance in ASC 470 would consider the cash receipts as a loan advance, it could be considered a loan advance, and therefore the original loan proceeds would be classified as a financing activity.
However, an entity may argue that since the loan proceeds will be used for operations and related expenses are recorded in operations, the proceeds should be recorded within operating activities. Either way is a reasonable approach for the portion of the loan that is forgiven. If there is portion of the loan that is not forgiven and repaid, the proceeds and payments would be best reflected as financing activities.
If an entity is following the guidance in ASC 958-605, the cash inflows would be included as operating activities.
What Disclosure Should Be Included in the Financial Statements for Loan Forgiveness?
In November 2015, the FASB issued a proposed ASU addressing disclosure for governmental assistance. While the project is still under deliberation, we believe it provides a reasonable framework for disclosure that includes four elements as follows:
- Information about the nature of the assistance, including a general description of the significant categories and the related accounting policies adopted or the method applied to account for government assistance.
- Which line items on the balance sheet and income statement are affected by government assistance and the amounts applicable to each line item.
- Significant terms and conditions of the agreement, including commitments and contingencies.
- Unless impracticable, the amount of government assistance received but not recognized directly in the financial statements.
Impact of PPP Loans Beyond Initial Forgiveness
Relief provisions and funding have come at a much-needed time for many organizations. But this is not simply free money. Knowing how to document and account for these funds and their subsequent loan forgiveness provisions will be essential long-term.
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