AICPA Issues Guidance on Accounting for Paycheck Protection Program Loans
June 11, 2020
SC&H’s Key Takeaways
- Paycheck Protection Program borrowers need to determine how to account for the loan and related expenditures
- Borrowers will have a choice between treating the proceeds as debt and recording the transactions as they normally would or treating the proceeds as a conditional grant
- Businesses need to think about loan covenants and the issuance of interim internal financial statements to lenders, investors and suppliers when making their decision
- Consideration should also be given to the tax treatment of expenses related to PPP loan spend
The AICPA recently released guidance regarding the accounting for Payroll Protection Program (PPP) loans. Under this guidance, borrowers may account for PPP loans as debt. Alternatively, if the borrower believes that the loan will be forgiven, the borrower can recognize the forgiveness as the borrower recognizes the related costs for which the loan is intended to compensate (i.e. payroll and related costs, utilities, rent and interest).
If the borrower elects to account for the loan as debt, the borrower should record the proceeds as a liability and accrue interest at 1%. There is no need to impute interest because of the loan’s below market rate as interest rates prescribed by governmental agencies are not subject to imputation of interest. The proceeds of the loan would remain as a liability until the loan is repaid or forgiven and the borrower has been legally released from its obligation. The borrower would record the forgiveness as a gain on extinguishment of debt.
If the borrower believes that it is probable that the loan will be forgiven, the borrower can effectively account for the loan as a conditional grant. Accordingly, the borrower would record the initial receipt of the loan as a liability and recognize the earnings impact of the grant in a systematic manner in the periods in which the borrower recognizes the related costs for which the grant is intended to compensate (i.e. record forgiveness income as eligible expenses are incurred or paid in accordance with the PPP regulations). The earnings impact can be recorded under a general heading such as “other income” or a reduction in related expenses.
The accounting by for-profit and not-for-profit entities is the same except for changes in terminology (i.e. contribution versus other income).
The accounting policy elected by borrowers should be adequately disclosed in the financial statements.
The choice of accounting policy will most significantly impact fiscal year-end clients as forgiveness will most likely be determined prior to the release of calendar year financial statements. However, given that loan forgiveness applications can be filed as late as ten months after the covered period ends and will take up to 150 days for the bank and SBA to review them, all businesses should start thinking about the accounting issues related to PPP loans this summer.
In selecting the appropriate accounting policy, the key question for management will be whether they believe that there is reasonable assurance (probable) that some or the entire loan will be forgiven. If the borrower elects to account for the loan as a conditional grant, changes in management’s estimate of the forgivable portion will be recorded as a change in estimate in the period in which the change in estimate is determined.
If you have any questions for the SC&H Group Team, please reach out to us directly through our website.