Accounting for PPP Loan Forgiveness
Many recipients of the federal Paycheck Protection Program (PPP) have begun submitting their application for loan forgiveness. Anticipating that the process will take months for forgiveness to be realized, most businesses are wondering how to account for it in the meantime. The uniqueness of the PPP has left some questioning if this should be accounted for as a liability or a grant. Based off the legal form of the PPP, a business should normally record it as debt. Others, given the nature of the forgiveness, have argued the loan was similar to a grant. In June of 2020, the American Institute of Certified Public Accountants (AICPA) published an update to their question and answer document explaining that recently staff at the Securities and Exchange Commission indicated they would allow for-profit businesses to account for the PPP loan in one of two ways – as debt or a grant.
When accounting for a PPP loan as a debt, it should be done in accordance with FASB ASC 470 and accrue interest in accordance with the interest method under FASB ASC 835-30. In other words, typical debt accounting. Note, even though the rate is only 1%, there is no need to impute more interest based on the below-market rate. Proceeds from the PPP loan should remain recorded as debt until the loan is officially forgiven. At that point, the debt is removed, and a gain is recorded on the extinguishment of debt.
If a business thinks it is probable its PPP loan will be forgiven, it can be accounted for as a grant. The key to this is understanding that the premise for this accounting is that the entity has met various thresholds to trigger the forgiveness. In the case of the PPP loan, much guidance has been issued explaining what expenses must be incurred to qualify for the forgiveness. Therefore, most entities who continued to compensate employees should have little problem triggering the forgiveness. The threshold used for “probable” is similar to that used in other accounting estimates. When taking this approach, the cash inflow should be recorded from the PPP loan as a deferred income liability. As expenses are incurred to trigger the forgiveness, the liability would be reduced with an offset to the income statement. The guidance suggested the entity has two choices in recognizing the credit in the income statement. The first option is to show other income. The second option is to credit the expenses incurred to trigger the forgiveness.
A non-profit entity may choose to record the PPP as debt using the same method described above. However, it may also account for the PPP loan as a conditional contribution.
Conditional Contribution Approach
If a non-profit determines the PPP loan represents, in substance, a grant expected to be forgiven, it should account for the loan as a conditional contribution in accordance with FASB ASC 958-605. Under this method, the timing of recognition for a contribution received depends on whether the contribution is conditional or not. If conditional, the contribution is not recognized until the conditions are substantially met or explicitly waived. To do this, cash inflow from the PPP loan would be recorded as a refundable advance. It would then reduce the refundable advance and recognize the contribution once the conditions of release have been substantially met, similar to the grant approach above, or explicitly waived.
Making the Call
It is likely many businesses will record their PPP loan as debt until their forgiveness application has been approved. However, in instances where bank covenants restrict a business’s ability to do this or the forgiveness may straddle a year-end, there is the grant alternative. 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. If you have additional questions or need assistance in accounting for a PPP loan, contact Doeren Mayhew's CPAs and advisors today.