Private companies receiving a PPP loan must now decide how to account for the loan and any loan forgiveness. The AICPA issued
Technical Question and Answer (TQA) 3200.18
Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program
There are two approaches to the accounting depending on your conclusion as to what the PPP loan represents:
The TQA explains that a company accounting for the PPP loan under Topic 470, Debt, would:
- Initially record the cash inflow from the PPP loan as a financial liability (loan payable) and would accrue interest (1% annual rate).
- Not impute additional interest at a market rate.
- Continue to record the proceeds from the loan as a liability until either (1) the loan is partly or wholly 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 once the loan is partly or wholly forgiven and legal a release is received.
According to the TQA, if a nongovernmental entity (i.e., a company) that is not a not-for-profit expects to meet the PPP’s eligibility criteria for loan forgiveness and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may account for the PPP loan as a government grant. The grant is earned through the company’s compliance with the PPP loan forgiveness criteria.
Under the government grant approach the company would record the PPP loan as a deferred income liability. There must be reasonable assurance (probable) that the loan will meet the conditions for forgiveness. The deferred income liability would be recognized into income as the company pays and recognizes the eligible payroll and eligible non-payroll costs as defined by the SBA for the PPP.
Please remember the guidance indicates the loan approach is always acceptable.
The credit to income can be recognized in the income statement as other income or as a reduction in the payroll and non-payroll expenses that resulted in the forgiveness of the PPP loan. Using a contra account by cost type will provide a clear audit trail to track the forgiveness amount.
Companies contracting with the federal government (government contractors) will want to elect to reduce the eligible payroll and non-payroll expenses that resulted in the forgiveness of the PPP loan.
Either way, the amount of debt forgiveness recognized as income should be clearly disclosed in the financial statements.
~Victor Ramsauer, CPA
President, CEO & Shareholder of LevitZacks, CPAs