During the past few months, many small businesses received forgivable loans through the Paycheck Protection Program (PPP) from the United States government. The AICPA recently released guidance for accounting for the PPP loans in Technical Question and Answers (TQA) 3200.18, Borrower Accounting for Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program. The guidance below only applies to for-profit entities.
The guidance provides four options for accounting for the PPP Loans.
Option 1 (Debt Extinguishment – ASC 470):
- Record the initial cash inflow from the PPP loan as a liability and accrue interest at the stated interest rate (don’t impute interest at a market rate).
- Present the proceeds from the loan as a liability until either (1) the loan is partly or entirely forgiven and the debtor has been legally released or (2) the debtor pays off the loan.
- Reduce the liability by the amount forgiven and record a gain on extinguishment of debt once the loan is partly or wholly forgiven and legal release is received.
Option 2 (Government Assistance – IAS 20, by analogy):
If the Company expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents a grant that is expected to be forgiven:
- Record the initial cash inflow from the PPP loan as a deferred income liability.
- Once the conditions for PPP loan forgiveness are probable, the earnings impact of the grant should be recognized as the related expenses are incurred. The reduction of the PPP loan deferred income liability would be recorded either as other income or as a reduction to the related expenses (compensation expense and rent expense) in the same period those expenses are recognized.
Option 3 (Conditional Contribution – ASC 958-605, by analogy):
- Record the initial cash inflow from the PPP loan as a refundable advance.
- Reduce the refundable advance and recognize contribution revenue once the conditions for forgiveness of the loan have been met or explicitly waived.
Option 4 (Gain Contingency – ASC 450-30):
- Record the initial cash inflow from the PPP loan as a liability.
- Record a gain in other income and remove the liability once all conditions related to forgiveness of the loan have been met.
If you need additional assistance about these options, feel free to contact me:
Audit Partner, Tanner LLC