As year-end approaches, a common question for a business entity is how to account for its forgivable loan received under the Small Business Administration’s Paycheck Protection Program (PPP). Does it record the proceeds as a liability until legally forgiven or does it reduce the liability and record a gain if the expectation is that the loan will be forgiven? The answer to this question is that it depends. Companies need to understand their options and consider several factors.
As described in a technical Q&A issued by the AICPA in June 2020, there are two allowable ways to account for a PPP loan:
- As forgivable debt, under Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) 470, whereby the proceeds from the loan remain recorded as a liability until either (1) the loan is forgiven and the debtor has been “legally released” or (2) the debtor repays the loan to the creditor. Once a company meets either of these scenarios, the company would reduce the liability and record a gain on extinguishment within other income. Regardless of whether the company expects to repay the PPP loan or expects forgiveness, it initially accounts for the PPP loan as debt and accrues interest at the stated rate within the loan.
- As a government grant, by analogy to International Accounting Standard (IAS) 20, whereby the proceeds from the loan are initially recorded as a deferred income liability and subsequently recognized over the period in which the company recognizes the expenses that the grant is intended to compensate, provided that the loan is probable of being forgiven. Under this method, the company either reduces the liability within other income or as a reduction of the expenses that the PPP loan covered.
While the first option is more conservative and reduces the chance of an adjustment in a future period, the second option matches the income on the PPP loan forgiveness against the expenses the PPP loan covers. There are several factors companies should consider when determining which method it will follow. These considerations include, but are not limited to, the following:
- Probability of forgiveness, in whole or in part
- Non-PPP lender recognition expectations or requirements for covenant purposes
- Methods chosen by benchmark or peer companies
Finally, companies will need to include adequate disclosure of their accounting policy for their PPP loans and the related impact to the financial statements.
PPP Accounting & Loan Forgiveness Guidance
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