As a business owner, you faced many challenges during 2020, some of which likely pertained to questions surrounding the Paycheck Protection Program (PPP). One area you may now be clarifying as you prepare to close the year is whether you appropriately accounted for your PPP loan and its forgiveness. To answer this question, the AICPA released a Technical Questions & Answers (TQA) publication in June 2020 that provided options that business owners could use to account for their PPP loans and the corresponding forgiveness. As shown in the table below, if a company 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 company has four separate options for accounting for their loan. However, if forgiveness is not anticipated or only partial forgiveness is anticipated, the company would be limited to recognizing the loan under FASB ASC 470, Debt. This article will take a brief look at each of these options.
|Available Methods||Forgiveness is Not Anticipated||Forgiveness is Anticipated|
|Financial liability in accordance with FASB ASC 470, Debt||X||X|
|Deferred grant income in accordance with FASB ASC 958-605, Not-for-Profit Entities: Revenue Recognition||X|
|Forgivable loan in accordance with IAS 20, Accounting for Government Grants and Disclosure of Government Assistance||X|
|Gain contingency in accordance with FASB ASC 450-30, Contingencies: Gain Contingencies||X|
Forgiveness is Not Anticipated or Only Partial Forgiveness is Anticipated:
- Financial liability in accordance with FASB ASC 470: Under this scenario, the loan would be recorded as debt just as you would for any other loan with a financial institution.
- The loan would be recorded as debt upon receipt of the funds, with the current portion of the loan being separately stated from the long-term portion. Interest would be accrued over the life of the loan and payments would be recorded as paid. If forgiveness was received, the forgiveness would be recognized as a gain on extinguishment upon officially receiving forgiveness from the lender.
- While interest must be accrued, there is no need to impute interest even though the stated interest rate is below market.
Forgiveness is Anticipated:
- Financial liability in accordance with FASB ASC 470 When forgiveness is expected, the first option that companies have is to account for the loan as debt, as discussed above.
- It is a worthwhile reminder that even when forgiveness is expected, a company using this method is required to accrue interest. This accrued interest would then be written off as a gain on extinguishment upon receiving forgiveness from the lender.
- One additional consideration is, if forgiveness is expected, the entire loan balance would be accounted for as current debt as opposed to reclassifying the current portion from the long-term portion.
- Deferred grant income in accordance with FASB ASC 958-605: ASC 958-605 is the not-for-profit guidance that addresses accounting for contributions. Typically, a for-profit entity would be unable to apply this guidance to its financials; however, under the TQA mentioned above, the AICPA presented this as an option for all entities.
- The loan is recorded as deferred grant income (a liability account) upon receipt and then recorded as grant income upon forgiveness conditions being substantially met or explicitly waived.
- Interest does not need to be accrued under this method, nor do you have to consider classifying the current and long-term portion of the loan. For both of these reasons, this method offers some simplicity as compared with ASC 470.
- Forgivable loan in accordance with IAS 20: The next option is to account for the loan under the International Accounting Standards guidance.
- Under this method, the company would record the cash inflow as a deferred income liability. This liability account would then be systematically offset as expenses are incurred. This recognition would either be offset through an other income account or as a reduction in the corresponding expense account.
- This method does require more tracking than the other three options. If this method is utilized, be sure to keep clear documentation of the recognition method for both internal purposes and any third-party professionals engaged.
- Gain contingency in accordance with FASB 450-30: The final option is to account for the loan as a gain contingency.
- The cash inflow would be recorded as a gain contingency and the gain would be recognized on the income statement once forgiveness is received from the lender.
- It is worthwhile to note that this standard provides less specificity on measurement and recognition requirements for PPP loans as compared with the other models offered by the AICPA.
- Timing of income recognition: A potentially significant distinction is that under ASC 470 and ASC 450-30, a company cannot recognize forgiveness until forgiveness is officially received from the lender. However, under ASC 958 and IAS 20, a company could either recognize the resulting income when the forgiveness requirements are substantially met or when forgiveness is officially received. This resulting flexibility could have a meaningful impact for companies depending on their circumstances.
- Tax basis: Be aware that when your entity’s tax return is prepared on a tax basis, the loan will be recognized in accordance with the Internal Revenue Code, which is similar to the method described under ASC 470, Debt, above. Under this accounting method, the loan will be recorded as debt until the lender determines that the loan is eligible for forgiveness. Upon forgiveness, the loan is not considered taxable income. Additionally, under the Consolidated Appropriations Act passed by Congress in December, the forgivable expenses paid with these loans are now tax deductible.
- Debt covenants: If the company has any debt covenants with any lending institutions, be sure to discuss the existence of the PPP loan and determine how it may impact the debt covenant calculation(s). In some instances, a waiver for a violation of covenants may be required.
Having visited each of the recognition options available to business owners, you should now have a foundation for making the determination of what method is appropriate for your business. If you have any specific questions in how these methods will effect your company, be sure to reach out to your BGBC team member for discussion.