This year, new buzz words have made their way into our everyday language—social distancing, the new normal, Zoom calls, and yes, even PPP loans. The subject of PPP loans has proven to be challenging and ever-changing. There are many aspects to this program that require a deeper dive to understand its requirements fully. One such factor is the treatment of a PPP loan related to accounting and financial statement presentation.
At ATKG, we have received so many questions from clients and prospects— “Is it a loan, is it income, or is it both?” “Do I need to record the expenses that the loan covers?” “How do I recognize the funds that come in once it is forgiven?” This article aims to cover the main questions you might have.
The legal form of a PPP loan arrangement is debt; however, the loan also has the appearance of a government grant. The FASB has currently pointed to the AICPA’s Technical Question and Answer (TQA), issued in June 2020, to guide the appropriate treatment of a PPP loan.
When PPP funds are initially received, the entity will record a liability for the full amount received. If the repayment extends for more than a year, the loan payable is viewed as a long-term liability, reduced by the amount scheduled for payment during the next year. This amount would be considered a current liability.
Although the Flexibility Act has deferred payments of interest and principal on PPP loans for a specific period, GAAP requires accrued interest on the loan be recorded in the period of the deferred interest payments or until the loan is forgiven, whichever comes first. Accrued interest on the loan is subject to forgiveness, along with the principal balance. The PPP loan interest rate is 1%, and monthly recordings of the accrued interest are required.
The entity must include the appropriate footnote disclosures, including the selected policy for accounting for the PPP loan and impact on the financial statements.
The loan must remain recorded as a liability until either:
Forgiven loans require the entity to reduce the liability by the amount forgiven and then record a debt extinguishment gain. This gain would be reported in the “other income” section of its income statement. The forgiven amount includes accrued interest amounts, which qualify for forgiveness. If only a portion of the loan amount is unforgiven, then the entry to record the forgiveness would be for the amount forgiven. The remainder of the loan remains a liability only to be reduced by payments made.
Suppose an entity that is not a not-for-profit entity expects to meet all eligibility criteria for forgiveness and believes the loan represents a grant to be forgiven. It can follow International Accounting Standards (IAS) 20 to account for the PPP loan as a government grant. Under IAS 20, government assistance is not recognized until there is the reasonable assurance (similar to “probable” in US GAAP) that conditions attached to the assistance will be met, and the assistance will be received, which in this case is using funds for eligible expenses and receiving forgiveness. When PPP funds are initially accepted, the entity will record a deferred income liability for the full amount received.
Under IAS 20, the entity will then reduce the liability as it recognizes expenses to which the loan relates. For example, say the entity received its PPP loan funds in May 2020 and then, in June 2020, used $20,000 for payroll (per the terms of the PPP loan). Two methods are available to reduce the liability when eligible expenses incur:
A reduction in the liability continues until PPP funds deplete. Upon approval of loan forgiveness, no entry is recorded based on the depletion of all PPP funds.
The entity is required to include the appropriate footnote disclosures, including the selected policy for accounting for the PPP loan, the nature and extent of grants recognized in the financial statements, and any unfulfilled conditions and contingencies attached to the original grant.
Not-for-profit (NFP) entities can choose to account for a PPP loan as debt (previously discussed above) or as a conditional contribution under FASB ASC 958-605(if the entity expects to meet all eligibility criteria for forgiveness and believes the loan represents a forgivable grant).
This method would be very similar to the process under IAS 20. Under FASB ASC 958-605, the timing of recognition depends on whether the contribution is considered conditional or not. If it is conditional, the contribution is not recognized until the conditions are substantially met or explicitly waived. When the PPP funds are received, the entity will record a refundable advance (liability) for the full amount received. The NFP entity would reduce the liability and recognize the contribution once the release conditions have been substantially met or explicitly waived.
How to properly account for and present PPP loans is only one of this significant program’s many aspects. Since PPP loans’ technicalities can be very challenging to execute and fully understand, we recommend consulting with ATKG’s subject matter experts to ensure PPP loans are accounted for appropriately. For more articles on PPP, Loans visit ATKG’s Coronavirus Newsroom.
Lila Casper is an Assurance Senior with ATKG. She received her bachelor’s in accounting and her Master of Accounting from The University of Texas at San Antonio, graduating Magna Cum Laude. After completing her degrees, Lila spent time at a Big 4 firm in California and then an Indiana-based local firm before joining ATKG in 2020. She has experience serving clients in manufacturing and distribution, construction, consumer services, retail, hospitality, and not-for-profit.
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