As new pronouncements and interpretations continue to be released about the forgiveness of PPP loans generated by the CARES Act, many organizations will soon be determining how to account for the partial or full forgiveness of this loan on their financial statements.
Non-governmental organizations receiving the PPP loan should have recorded an initial liability and should be accruing for interest on that loan. FASB ASC 405 and 470 provide guidance on accounting for a loan and forgiveness of a liability. That guidance clarifies that the forgiveness of a loan is to be recognized when the debtor is legally released from their obligation. As we look to forgiveness on a PPP loan, this would seem to take place when the debtor receives notification from the SBA or their bank that the loan has been forgiven.
TQA 3200.18 acknowledges that some individuals contend that the PPP Loan is, in substance, a "governmental grant" instead of a loan.
Accounting principles generally accepted in the United States (US GAAP) provides guidance for grants in FASB ASC 958 under guidelines for conditional contributions. This section of the guidance applies to non-profit entities. For non-profit entities that believe this PPP Loan is really a "governmental grant," they would follow the guidelines to account for conditional contributions. These specify that a liability be recorded until the entity has substantially completed all required conditions of the grant or the conditions are waived by the grantor. As we look to forgiveness on a PPP loan, this would take place sooner than the receipt of notification that the loan has been forgiven.
TQA 3200.18 also offers that any entity (for-profit in this scenario) who does not find explicit applicable guidance within US GAAP still has options. US GAAP suggests that when there is no clear guidance available, entities may look to other parts of the accounting guidance to analogize the proper treatment in their situation. Following this process, a for-profit entity believing this transaction to be a grant could analogize guidance from non-profit section (FASB ASC 958) that otherwise would not apply to them. They may also seek to analogize from International Accounting Standards.
In all cases, the organization should disclose their accounting policy and treatment of these PPP loans within the footnotes of their financial statements. A liability will be recorded on the front end, regardless of whether the transaction is viewed as a loan or a governmental grant. Accrued interest will also need to be recorded and addressed.
The effective difference between the two views (loan versus governmental grant) seems to be the date when the liability is converted into income. In the forgiveness of a loan, the liability is converted upon legal release of the obligation. In the conditional contribution (or grant), the liability is converted when the conditions are substantially met.