On June 10th, the AICPA issued Technical Question and Answer (TQA) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program. This guidance has been published to address accounting matters specific to Paycheck Protection Program (PPP) loan forgiveness for nongovernmental for-profit and nonprofit entities and to provide each with alternative accounting methods.
Accounting in Accordance with US GAAP
Provided certain conditions are met, a nongovernmental entity using accounting standards in compliance with generally accepted accounting principles in the United States (US GAAP), whether for-profit or nonprofit, may account for a PPP loan as a financial liability in accordance with FASB ASC Topic 470, Debt. The liability remains until you have been legally released as the debtor, as the loan is either partially or fully forgiven, or you have fully paid off the loan. A reduction to the liability should be recorded for the amount forgiven once partial or full forgiveness occurs, and a gain on extinguishment should be recorded when you have been legally released from the repayment obligation. Interest accrues in accordance with the interest method, as outlined in ASC Subtopic 835-30, and additional interest is not imputed at a market rate.
Alternatively, business entities may, providing certain criteria are met, use the guidance in one of two Accounting Standards Codification (ASC) subtopics: ASC Subtopic 958-605 or ASC Subtopic 450-30. Nonprofits foregoing adherence to ASC 470 should account for such PPP loans as a conditional contribution in accordance with ASC Subtopic 958-605. We have summarized both ASC models below.
Accounting for Contributions (ASC 958-605) – In general, this model applies to nonprofits when recording contributions. When appropriate, however, for-profit entities may apply this model by analogy. If the contribution is conditional, it is not recognized until the conditions are either explicitly waived or substantially met. So, under this model, the PPP loan would initially be recorded as a refundable advance, followed by a reduction to the refundable advance. Once the conditions have been substantially met or have been explicitly waived, recognition of the contribution occurs.
Gain Contingency Recognition (ASC 450-30) – When applying this model, a for-profit entity would initially record the proceeds as a liability, and, once all contingencies related to receipt of the loan have been met and the grant proceeds are realized (or are realizable), the earnings impact would then be recognized.
Accounting in Accordance with IAS
For-profit entities may elect to treat the PPP loan as a governmental grant under International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance. Provided the loan is expected to be forgiven and certain other conditions are met, the loan would be initially recorded as a deferred income liability and, on a systematic basis – over the periods in which the entity recognizes related expenses – reduced either by offsetting the related expenses or as a separate heading under “other income”.
Regardless of the chosen model, the AICPA has advised all entities with material PPP loans to ensure adequate disclosure of their related accounting policies in their financial statements, including disclosure of the related impact of the chosen method on your financial statements. Additional AICPA resources on accounting for PPP loans may be found on the AICPA’s website.
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by Jason LeBlanc, CPA