Accounting Guidance on PPP Loans

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.

Record as Debt

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: 

  1. In part or wholly, the loan is forgiven, and the entity is “legally released” from its obligation, or 
  2. The entity pays off the loan to the creditor.

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. 

Accounting guidance on PPP loans

Record as Grant

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: 

  1. The entity can record the reduction of the liability as other income, or 
  2. It can record the reduction of the liability as a credit against the related expense.

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 Entities

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.

ATKG Can Help

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.

testimonials

‘‘My father and I have used ATKG since the days of its founder James Ahern, and they have always provided excellent and accurate advice.’’

A Client

‘‘I can't name just one reason about Eric and Hayley! Their proactivity, creativity, collaborative spirit, and communication are all absolutely incredible.’’

A Client

‘‘Everyone that I have worked with at ATKG is extremely friendly, helpful, and always very responsive!’’

A Client

‘‘We appreciate ATKG's responsiveness, timeliness, and good communications’’

A Client

‘‘Very personable and knowledgeable. Over the years, I have created great relationships with Teryn Grater, Diane White, and the seniors and managers on my account.’’

A Client

‘‘I call them my ATKG team!’’

A Client

‘‘I couldn't be happier with the choice to move from EY to ATKG. A.J. Sturm, Diane White, Alisha Bell, and the support staff have been instrumental in helping me with a complicated Estate and Foundation scenario. Not only have they provided me with phenomenal accounting and tax advice, but they have also gone above and beyond to help me plan for today, tomorrow, and far beyond. Thank you, ATKG!!!’’

A Client

‘‘We continue to consider ATKG a part of our personal and business planning team. They are a professional firm with an impeccable level of service.’’

A Client

‘‘ATKG is very professional, responsive, and client-oriented. They are committed and make a point to communicate with annual meetings and anytime I have a question.’’

A Client

‘‘Angie Stone and her team provided valuable forensic accounting services and excellent litigation support in some complex family law cases handled by our firm.’’

A Client

‘‘Angie Stone and Courtney Mastin are prompt in their response to any inquiry our clients or I may have. Additionally, everyone at ATKG maintains a wonderful level of professionalism.’’

A Client

‘‘Great people, good response time, and helpful’’

A Client

‘‘Excellent customer service. Rapid response to questions!’’

A Client

‘‘Great people and very informative, up-to-date with ever-changing rules and guidelines in this ever-changing government!’’

A Client

‘‘ATKG is invested in my success and is highly responsive to my needs.’’

A Client

‘‘ATKG offers great customer service.’’

A Client

‘‘Prompt service and excellent forecasting. I also feel that I get tremendous support, more than I have received in the past.’’

A Client

‘‘Katie provides great service and is very knowledgeable.’’

A Client

‘‘Been working with ATKG for several years; they are extremely professional, knowledgeable and offer great customer service.’’

A Client

‘‘ATKG provides services up and above any other accounting firm I have ever used. They want to help their clients manage their wealth and offer to help teach their children about wealth and how to manage it.’’

A Client

‘‘She is friendly, responsive, and knowledgeable.’’

A Client

‘‘David and the ATKG team are knowledgeable regarding current tax issues, and they are extremely responsive to all questions.’’

A Client

‘‘A. J. is professional, knowledgeable, and provides friendly assistance.’’

A Client

‘‘Eric and Sarah do an excellent job handling our account and promptly answering questions. They are proactive in planning meetings and looking forward.’’

A Client

‘‘Our ATKG team, which includes Eric, Ruth, Katie, and Shannon is incredibly knowledgeable, professional, and supportive of our business. Client service always feels like it is at the forefront of their mind.’’

A Client

‘‘Loyal, excellent service over 35 years with Melanie and her team.’’

A Client

‘‘Our interactions with Diane and the ATKG team are always a model for how a professional services company should interact with its clients. With ATKG, we know that our finances are in good hands.’’

A Client

‘‘Melanie, Teryn, and Sandy have clearly had my and my family's best interests at the forefront. I have had a 19-year relationship that has proved to be very beneficial to my family and me.’’

A Client

‘‘Melanie, Teryn, and Katie offer us confidence.’’

A Client

‘‘Diane and Shannon are a critical resource and partner to our firm. They are knowledgeable, responsive, and dependable on all levels.’’

A Client

‘‘Diane and Shannon provide great service. They are very knowledgeable and are always willing to assist our group with sage advice.’’

A Client

‘‘Teryn is always quick to respond to questions and on top of the latest accounting rules.’’

A Client

‘‘Amanda and Shannon offer us consistent communication’’

A Client

‘‘Great work, timely, and the best part....nice folks!’’

A Client