UPDATED June 15, 2020 – The AICPA, in consultation with the FASB and the SEC, has released the following Technical Question and Answer (TQA) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program. The following summaries the guidance in this TQA.
Paycheck Protection Program (PPP) was created as part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to provide certain small businesses with loans to support their operations. These loans are intended to be forgiven if certain requirement (discussed here) are met. The following summaries PPP loan and forgives accounting for Not-For-Profit (NFP) and for-profit entities (business entities).
The accounting for PPP loan proceeds can be accounted for as either debt or a government grant (contribution) depending on whether the entity expects the loan to be forgiven.
Accounting for NFPs
NFP entities basically have two options:
- Option 1 – Record the loan as debt when received. Under this method interest would be accrued as incurred and loan forgiveness would be accounted for as a contributions. Included in the definition of a contribution is the reduction of liabilities. Once the forgiveness application is approved and the forgivable amount determined, the debt would be removed and contribution revenue recorded.
- Option 2 – Treat the PPP loan as a conditional contribution when received. This accounting is best used when the intention is to have the full amount forgiven. Contributions are either conditional or unconditional. Conditional contributions include a barrier that must be overcome for the recipient to be entitled in the funding as well as a right of return or a right that releases the funder from future payments. The PPP loan program includes specific spending requirements (payroll and certain nonpayroll costs) that can be considered barriers, if not met the funding must be paid back. Under this method a refundable advance (liability similar to deferred revenue) would be recorded when the funds are received and contribution revenue would be recognized as qualifying expenditures are incurred that are eligible for forgiveness. By incurring these qualifying expenditures (payroll and certain nonpayroll costs) the NFP is overcoming the barrier(s) and the contributions is now considered unconditional. Remember that under NFP contribution accounting conditions determined revenue recognition while restriction determined net asset classification.
Accounting for Business Entities
Unfortunately, there is no clear guidance on the accounting by for-profit business entities that receive the PPP loans. Business entities will need to determine the appropriate accounting treatment by considering guidance for similar transaction within U. S. Generally Accepted Accounting Principles (U.S. GAAP) or by applying relative guidance outside of U.S. GAAP.
- Option 1 – Same as option 1 above but the contribution recognized by the NFP could be classified as a gain on loan extinguishment on the income statement.
- Option 2 – Same as option 2 above. While this option permits the for-profit to change the label or name of the revenue line from “contributions” to something more descriptive of the transaction, such as “PPP loan forgiveness”, the revenue line item will need to be presented separately at gross on the income statement.
- Option 3 – Apply International Accounting Standards (IAS) 20. The accounting is similar to option 2 above, where a refundable advance would be recorded when the funding is received and contribution revenue recorded when qualifying expenditure are incurred, but this standards provides additional presentation options. Under IAS 20, income from PPP loan forgiveness can be presented either (1) gross revenue on the income statements or (2) netted with related expenses.
Whichever option is selected, the method of accounting will need to be fully disclosed.
For additional guidance and resources on PPP loans for Nonprofits, visit our Nonprofit & Associations COVID-19 Hub or contact our COVID-19 Advisory Team at 301.231.6200.