For most in the world, Covid-19 is our first experience with a widespread pandemic. It’s also our first experience with the responses of our local, state and federal officials. From a US perspective, the SBA’s $650+ billion Paycheck Protection Program (PPP) was the first of its kind, included in a much larger $2 trillion stimulus package. Rolling out a program of this magnitude has been met with public comments and scrutiny, and a seemingly infinite loop of questions around uncertain SBA guidance, followed by SBA clarification, which then produces more questions, and so on.
If your commercial business has received a forgivable loan under the PPP, the question of how to account for that loan has probably been a topic of discussion. Given the PPP is unprecedented, authoritative guidance with the FASB Accounting Standards Codification does not exist. To help address the varying thoughts on this topic, both the AICPA and its Center for Plain English Accounting (CPEA) recently published technical Q&As and special reports on this topic and have discussed several accounting alternatives.
The legal form of the PPP loan is debt, but some believe that the loan is, in substance, a government grant. Whether you view the PPP as a loan to be repaid or a grant to be forgiven, you may account for the loan like other financial liabilities in accordance with ASC 470: Debt, and accrue interest in accordance with ASC 835-30: Imputation of Interest. Specific to derecognition, ASC 405-20: Extinguishments of Liabilities dictates that the loan proceeds would remain recorded as a liability until either (1) the debtor pays the creditor and is relieved of its obligation for the liability or (2) the debtor is legally released from being the primary obligor under the liability. Once the loan is, wholly or in part, forgiven, you would reduce the liability by the amount forgiven and record a gain on extinguishment.
If you expect to meet the PPP forgiveness eligibility requirements and conclude that the PPP loan is a grant and forgiveness is probable,b you may analogize to International Accounting Standards (IAS) 20.a Under IAS 20, a government grant would be recorded as a deferred income liability upon receipt of the cash proceeds. Subsequently, you would reduce the liability, with the offset to (1) other income or (2) a reduction in related expenses, as expenses (payroll, rent, etc.) to which the grant relates are incurred.
While it may seem unusual for a commercial business, AICPA staff recognizes you may analogize to ASC 958-605: Not-for-Profit Entities – Revenue Recognition, even though this topic specifically excludes contributions made by governmental entities. Under ASC 958-605, a governmental grant would be recorded as a refundable advance upon receipt of the cash proceeds. Subsequently, you would reduce the refundable advance and recognize the contribution revenue once the condition(s) of release have been substantially met or explicitly waived.
Finally, AICPA staff also recognizes that you may analogize to ASC 450-30: Gain Contingencies. Under ASC 450-30, a contingency that might result in a gain usually should not be reflected in earnings because to do so might be to recognize revenue before its realization. In connection with a PPP loan, a financial liability would be recorded upon receipt of the cash proceeds, and the liability would remain until all uncertainties relating to the final forgiveness of the loan are resolved.
Lastly, no matter which accounting alternative is selected, the AICPA reminds all commercial entities with material PPP loans to ensure they adequately disclose their accounting policies for such loans and their related impacts to the financial statements.
Ultimately, as the SBA continues to clarify the PPP, and most specifically, the aspects surrounding forgiveness, continued change looks to be inevitable. So, too, may be the accounting guidance. As always, we will continue to monitor communications from the accounting standard setters and provide any updates. Reach out with questions.
a In the absence of specific guidance within the FASB ASC, ASC 150: Generally Accepted Accounting Principles indicates an entity shall first consider accounting principles for similar transactions or events within a source of authoritative GAAP for that entity and then consider non-authoritative guidance from other sources (commonly referred to as “analogizing”).
b As defined within the FASB ASC Master Glossary, “probable” is (1) that which can reasonably be expected or believed on the basis of available evidence or logic but is neither certain nor proved, and (2) the future event or events are likely to occur.