The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Paycheck Protection Program (PPP) to provide eligible entities, including small businesses and not-for-profit (NFP) organizations, with liquidity to support their operations and to keep their employees paid. PPP loans may be forgiven, in whole or in part, if certain conditions are satisfied including spending the PPP funds on qualifying expenses and maintaining specified levels of payroll and employment. Entities who borrow PPP funds will apply for forgiveness after their applicable covered period by submitting an application to their lender that will include documentation of payroll, employment levels, and payment of qualifying expenses. A lender has up to 60 days to review and approve the application, and forward the application to the Small Business Administration (SBA). The SBA has up to 90 days to review and approve the application for forgiveness.
Recently, the American Institute of CPAs (AICPA) issued Technical Question and Answer (TQA) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program. Although the TQA is nonauthoritative, it provides guidance to nongovernmental entities, including businesses and not-for-profit organizations, for how to account for PPP loans. The following information is based on our understanding of the TQA as well as subsequent information reported by the AICPA’s Center for Plain English Accounting (CPEA). This information is subject to change based on the issuance of any authoritative guidance as well as any further clarifications or changes within PPP rules and regulations.
Regardless of whether an entity is a business entity or a not-for-profit organization and whether it expects to repay the PPP loan or to apply to have it forgiven, the entity may account for the loan as a liability in accordance with FASB Accounting Standards Codification (FASB ASC) 470, Debt (Debt Model). Under this model, interest is accrued at 1% over the term of the loan; additional (market rate) interest would not be imputed. For purposes of derecognition of the liability, the loan would remain recorded as a liability until either (1) the loan is forgiven and the entity is “legally released” as the loan’s primary obligor or (2) the entity repays the loan. Once the loan is forgiven, in whole or in part, an entity would reduce the liability by the amount forgiven and record a gain on extinguishment of debt. Not-for-profit organizations may choose to report the gain on extinguishment as contribution revenue. In terms of PPP and its conditions surrounding forgiveness, legal release will likely not take place until such time that the SBA has approved the application for forgiveness.
Currently, there is no U.S. GAAP guidance for how a business entity should account for government grants. If a business entity that is not a not-for-profit organization, 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, the entity may analogize how to account for the PPP loan based on one of the following models:
International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance (government assistance model)
Under this model, the earnings impact of a government grant is not recognized until there is “reasonable assurance” that the business entity will meet the conditions attached to the grant (such as terms for forgiveness of a loan) and that the grant will be received. Reasonable assurance is similar to the threshold for “probable” assurance, which is defined as the future event or events are likely to occur. Once there is reasonable assurance that the conditions will be met, revenue from a government grant is recorded on a systematic basis over the periods in which the business entity recognizes the related costs for which the grant is intended to compensate. This model allows a business entity to project the likelihood of meeting the conditions. In terms of PPP, a business entity would initially record the loan as a deferred income liability. Assuming a business entity is able to assert that it is probable that the business entity will meet the qualifications and conditions for PPP forgiveness, the business entity would reduce the liability, with an offset through earnings (either as a credit in the income statement or a reduction of the related expenses), over the periods in which the business entity recognizes the related costs to which the grant relates.
FASB ASC 958-605, Not-for-Profit Entities: Revenue Recognition (conditional contribution model)
Although FASB ASC 958-605 addresses the accounting for contributions by not-for-profit organizations and excludes contributions made by governmental entities to business entities, the FASB staff have acknowledged that business entities are not precluded from applying the guidance by analogy when appropriate. Under this model, the timing of recognition for contribution revenue depends on whether the contribution is conditional or not. If conditional, contribution revenue is not recognized until all of the conditions are “substantially met” or explicitly waived. The conditions need to be substantially met based on what has taken place as of the balance sheet date without any ability to forecast the likelihood of meeting the conditions in the future. In terms of PPP, an entity would initially record the loan as a refundable advance (liability). The entity would then reduce the refundable advance and recognize contribution revenue (or alternate name such as PPP loan forgiveness) once the conditions have been substantially met or explicitly waived. In cases where conditions are met over time or in stages, contribution revenue should be recognized when the conditions or barriers have been overcome such as when an entity incurs qualifying expenses. An entity should consider all of the conditions of PPP forgiveness, including qualifications to receive a PPP loan, spending the PPP funds on qualifying expenses, maintaining specified levels of payroll and employment, and related certifications before concluding that conditions have been substantially met.
FASB ASC 450-30, Contingencies: Gain Contingencies (gain contingencies model)
Under this model, the earnings impact of a gain contingency is recognized when all of the contingencies related to receipt of the assistance have been met and the gain is “realized or realizable”. As applied to PPP, a business entity would initially record the loan as a liability. The loan would remain recorded as a liability until the gain on forgiveness is realized or realizable. In terms of PPP and its conditions surrounding forgiveness, it is likely that this would not occur until all uncertainties regarding the forgiveness of the loan are resolved, namely when the SBA has approved the application for forgiveness.
If a NFP organization chooses not to follow the debt model under FASB ASC 470 and it 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, a NFP organization should account for the PPP loan as a conditional contribution in accordance with the conditional contribution model under FASB ASC 958-605 noted above. NFP organizations are precluded from adopting the government assistance model under IAS 20 or the gain contingencies model under FASB ASC 450-30.
All entities with material PPP loans should disclose their accounting policy for such loans and the related impact on their financial statements. Further, each respective model noted above may have additional disclosure requirements.
Entities with PPP loans have more than one accounting option available to them. It is important that management review the accounting options available and the recognition considerations of each model so that thoughtful decisions can be made. Management should keep in mind that formal forgiveness (income) may take place in a reporting period different from when the qualifying expenses were incurred. It is also important to consider the impact of accounting recognition on any applicable debt covenants or ratios. We recommend you consult with your ORBA team, for questions you have regarding the accounting for PPP loans,