With the passing of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) comes additional challenges for many companies from an accounting and reporting perspective. The act included many provisions, such as grants, employer retention credits and the infamous Small Business Administration’s (SBA) Paycheck Protection Program (PPP) that will have a significant impact on the financial reporting of companies applying U.S. Generally Accepted Accounting Principles (GAAP). To assist your company in navigating the accounting complexities, Doeren Mayhew shares input on where guidance related to these provisions stands today.

Grants and Employee Retention Credits

Many businesses are taking advantage of government assistance to survive the economic impact of the COVID-19 pandemic. But how should a company account for these?

Due to the employee retention credits and grants enacted by the CARES Act not being accounted for under ASC 740, there is still much uncertainty for how a business should account for these government assistance elements under GAAP. Without formal guidance, there is not a correct answer and will likely be handled differently on a case-by-case basis by analyzing the nature of the assistance and the conditions on which it is predicted.

Unless further guidance is provided, we recommend leveraging the decision-making framework laid out by GAAP by looking for similar transactions and applying that guidance. If this transaction is truly unique, a company may request guidance from an outside source. Companies can also look to both IAS 20 and ASC 958-605 for guidance, as they differ in accounting for government grants. Of the two, IAS 20 contains “probable” verbiage and doesn’t define “reasonable assurance,” ASC 958-605 does not permit probability and income is only recognized when conditions have been substantially met.

PPP and Loan Forgiveness

Within the CARES Act are loan packages, which specifically includes a new provision that caps the interest rate for certain loans to businesses through the SBA’s PPP. Eligible borrowers have the opportunity to receive below-market rate loans to sustain payroll and pay other debts.

Currently, there is no guidance under U.S. GAAP specifically addressing the accounting for a forgivable loan from a government entity. Until expected guidance is released, PPP loans should be accounted for as a debt instrument keeping in mind the below:

  • Proceeds from PPP should be recorded as debt within the balance sheet until formally forgiven.
  • Costs paid to third-parties may be deferred and amortized over the term of the debt.
  • Interest should be accrued at the stated rate of 1% on a monthly basis until it is documented that it will be eligible for forgiveness.
  • Costs of qualified expenses should continue to be accounted for through earnings, consistent with existing policies.
  • Interest does not need to be imputed on such governmental loans with a below-market interest rate.
  • Gain on forgiveness should be measured based on the net carrying value of the PPP loan, including accrued interest and deferred finance costs. Whether the forgiveness should be shown as other income or netted against the expenses paid with the loan on the statement of operations has not been formally determined as of this date. Either presentation may turn out to be appropriate options if formal guidance is not issued.
  • Include a subsequent event disclosure.

Doeren Mayhew will continue to monitor accounting guidance related to provisions of the CARES Act and will update you with any anticipated forthcoming regulatory clarifications. In the meantime, should you have questions on how the accounting of these new stimulus provisions should be handled for your entity, contact Doeren Mayhew’s CPAs.