June 2020 Foodman website and JD Supra

The PPP (Paycheck Protection Program) was established by Congress to assist small businesses during the Covid-19 pandemic as part of the $2 trillion CARES Act.  Via the PPP, the U.S. Treasury requires the U.S. Small Business Administration (SBA) to fund loans up to $10 million for business borrowers to cover payroll, mortgage interest, rent, and utilities.

How do Business Borrowers do the Accounting for a PPP Loan?

A   PPP loan is a liability of the borrower.

As a financial liability and in accordance with FASB ASC 470, it accrues interest in accordance with the interest method under FASB ASC 835-30. For a financial liability to be “derecognized”, FASB ASC 470-50-15-4 refers to guidance in FASB ASC 405-20.

That said, the forgiven part of the loan will not be treated as taxable income by the IRS; causing a permanent Financial Statement versus income tax reporting difference that will require disclosing in financial statements presented under Generally Accepted Accounting Principles. 

Guidance in FASB ASC 405-20-40-1

Guidance in FASB ASC 405-20-40-1 states that the proceeds from the loan would remain recorded as a liability until either:

  • “the loan is, in part or wholly, forgiven and the debtor has been “legally released”” or
  • “the debtor pays off the loan to the creditor”

“Once the loan is, in part or wholly, forgiven and legal release is received, a nongovernmental entity would reduce the liability by the amount forgiven and record a gain on extinguishment”.

Business Borrowers that expect to meet the PPP’s eligibility criteria and conclude that the PPP loan represents a grant that is expected to be forgiven, may refer to IAS 20 to account for the PPP loan

IAS 20 provides an outline for a model for the accounting for different forms of government assistance (including forgivable loans). Under the model, government assistance is not recognized until there is reasonable assurance (like the “probable” threshold in U.S. GAAP) that:

(1) any conditions attached to the assistance will be met and

(2) the assistance will be received.

When Reasonable Assurance that the conditions will be met exists:

  • The earnings impact of government grants is recorded “on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.”
  • A business entity would record the cash inflow from the PPP loan as a deferred income liability.
  • A business entity would reduce the liability, with the offset through earnings presented as:  either a credit in the income statement, either separately or under a general heading such as “other income,” or  a reduction of the related expenses), as it recognizes the related cost to which the loan relates. 

Accounting for PPP loans is Complex

When signing the PPP loan application, the Business Borrower is making Representations and Certifications.  The Business Borrower’s eligibility for loan forgiveness will be evaluated according with PPP regulations and guidance issued by SBA through the date of the application. SBA may direct a lender to disapprove a Borrower’s loan forgiveness application if the SBA determines that the Borrower was ineligible for a PPP loan. 

PPP Business Borrowers ought to consult their Accounting and Tax Specialist for ensuring their eligibility criteria and concluding that their loans are indeed grants and are “forgivable”.