PPP Loans: Accounting & Reporting Considerations
Filed under:Affordable Housing, Construction, COVID Updates, Dental, Family Business, FQHC, Healthcare, Nonprofit, Small Business Services
The Paycheck Protection Program (PPP) has been a savior to many for-profit companies and not-for-profit organizations, but it has also certainly come with its complexities. Questions regarding loan eligibility, the application process, and calculation of qualifying expenses quickly arose. And then, there is the issue of how to report the PPP loan and its potential forgiveness in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP). This issue is top of mind for many entities that received PPP loans. The following summarizes some of the accounting and financial reporting options for the PPP Loan under the current standards and guidance.
The following information is not guidance for income tax reporting purposes. We recommend you seek advice from your tax advisors.
Entities that Expect to Have Some or All of Their PPP Loan Forgiven
For not-for-profits (NFPs) that intend to seek forgiveness, it is reasonable to treat the PPP loans as government grants and account for the funds in accordance with Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 958-605, Not-for-Profit Entities: Revenue Recognition, which treats the PPP loans as contributions. Contributions under FASB ASC 958-605-15-5a are defined as “contributions of cash and other assets, including promises to give, or a reduction, settlement, or cancellation of liabilities.” FASB ASC 958-605-55-21 notes, “other promises are conditioned on promisees’ incurring certain qualifying expenses (or costs). Those promises become unconditional and are recognized to the extent that the expenses are incurred.” In accordance with this standard, as qualifying PPP expenses were incurred, a contribution would be recognized for the portion of the PPP loan that is expected to be forgiven. Under this treatment, it is not appropriate to net expenses for the amount of PPP loan expected to be forgiven. The NFP would report (contribution) income and related expenses on a gross basis. If an NFP estimated that a certain portion of the PPP loan would not be forgiven, that portion should be accounted for as a liability as noted above.
There is no specific guidance for treatment of a loan to a business entity that may be forgiven if conditions are satisfied. However, U.S. GAAP does note that in the absence of specific guidance, “an entity shall first consider accounting principles for similar transactions or events within a source of authoritative U.S. GAAP for that entity and then consider non-authoritative guidance from other sources” (FASB ASC 105-10-05-2). Therefore, there is suggested guidance to which business entities may refer when accounting for their PPP loans. We have included two accounting and reporting options below. Business entities should consult with their CPA on their particular circumstances when deciding which accounting policy to elect.
Analogizing Contribution Accounting to Business Entities
Generally NFP contribution accounting under FASB ASC 958 includes scope exceptions for business entities; however, the FASB did not prohibit business entities from essentially applying those standards for similar situations (analogizing). A business entity applying the FASB ASC 958-605 government grant model to a PPP loan (as noted above for NFPs), would generally recognize contribution revenue as it incurs qualifying PPP expenses assuming conditions are “substantially met.” In these circumstances, the business entity recipient accounting would be very similar to that of the NFP as noted above. Take note that the revenue recognized due to the loan forgiveness is not within the scope of FASB ASC 606, Revenue from Contracts with Customers. As such, revenue recognized should be separately stated and labeled on the financial statements. This accounting treatment is appropriate only when there is a high likelihood of loan forgiveness. If there is not probable loan forgiveness, a business entity should assess whether this accounting treatment or treatment under FASB ASC 470, Debt is most appropriate for users of its financial statements.
Looking to International Accounting Standards
International Accounting Standards (IAS), although not considered authoritative in the FASB ASC, may be consulted in cases where the accounting treatment for a particular transaction or similar transaction is not specified in the FASB ASC. IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, provides guidance on government grants for business entities. IAS 20 states that, “a government grant is recognized only when there is reasonable assurance that (a) the entity will comply with any conditions attached to the grant and (b) the grant will be received.” IAS 20 also states, “the grant is recognized as income over the period necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis.” By utilizing IAS 20 as a non-authoritative source of guidance, a business entity would recognize as income the PPP loan forgiveness as qualifying expenses were incurred. This accounting treatment is also appropriate only when there is a high likelihood of loan forgiveness. If there is not probable loan forgiveness, a business entity should assess whether this accounting treatment or treatment under FASB ASC 470, Debt is most appropriate for users of its financial statements.
Entities that Expect to Repay Their PPP Loan
For entities that expect to repay their PPP loan, the loan should be accounted for in accordance with FASB ASC 470, Debt which requires the loan to be reported as a liability (debt) and for related interest to be accrued and also reported as a liability. FASB ASC 405-20 Liabilities: Extinguishments of Liabilities states the debtor shall derecognize the liability if and only if it has been extinguished through payment or at the time the debtor is legally released as the primary obligor under the liability. In the case of the PPP loan, the extinguishment would be recognized as the loan and related interest was repaid or at the time forgiveness actually occurs. This treatment may be the most appropriate in cases where the debtor is not able to establish that it can meet “no more than a remote threshold” for repayment of the PPP loan due to uncertainties about meeting the conditions of forgiveness.
In conclusion, the PPP loan has been helpful to many business entities and NFPs but has created some uncertainty for proper accounting and reporting. In any case, management should assess which accounting treatment is most appropriate for the entity’s unique circumstances and what is most appropriate for reporting to the users of the financial statements.
Jones & Roth is committed to providing up-to-date information on the PPP and COVID-19. See jrcpa.com for the latest news.