By Richard Koch, CPA
Director of Quality Control at Gray, Gray & Gray
As recipients of loans made through the federal Paycheck Protection Program (PPP) begin to submit their applications for loan forgiveness, it is incumbent upon us to also ascertain how such forgiveness of debt will be accounted for in a borrower’s financial statements, in accordance with Generally Accepted Accounting Principles (GAAP).
The American Institute of Certified Public Accountants recently published “Q&A Section 3200 – Long-Term Debt – .18 – Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program” (“Q&A”). You can download it here.
The Q&A provides guidance on how a nongovernmental entity (business entities and not-for-profit entities) should account for a forgivable loan received under the Small Business Administration Paycheck Protection Program.
Regardless of whether the nongovernmental entity expects to repay the PPP loan or believes it represents, in substance, a grant that is expected to be forgiven, it may account for the loan as a financial liability and accrue interest.
The proceeds from the loan would remain recorded as a liability until either, (1) the loan is, in part or wholly, forgiven and the debtor has been “legally released;” or (2) the debtor pays off the loan to the creditor. Once the loan is, in part or wholly, forgiven and legal release is received, a nongovernmental entity would reduce the liability by the amount forgiven and record a gain on extinguishment.
A business entity (e.g. a business other than a not-for-profit entity) expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, when there is reasonable assurance (e.g. similar to the “probable threshold in U.S. GAAP) that any conditions attached to the assistance will be met and the assistance will be received. The earnings impact of government grants is recorded on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. Specifically, a business entity would record the cash inflow from the PPP loan as a deferred income liability. Subsequent to initial recognition, a business entity would reduce the liability, with the offset through earnings as either a credit to the income statement (e.g. “other income”) or a reduction of the related expenses (e.g. “compensation expense”).
If a not-for-profit entity chooses not to record the loan proceeds as long-term debt and it expects to meet the PPP’s eligibility criteria and conclude that the PPP loan represents, in substance, a grant that is expected to be forgiven, it should account for such PPP loans as a conditional contribution.
While the PPP loan program has helped many small businesses during the economic disruption caused by the COVID-19 pandemic, it does require careful accounting following approved practices. If you have additional questions or need assistance in accounting for a PPP loan, please contact Gray, Gray & Gray at (781) 407-0300.