AICPA issues guidance on how to account for PPP loans
On August 28, the American Institute of Certified Public Accountants (AICPA) issued a technical accounting guide that explains how lenders should report forgivable loans made under the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). Here’s what banks and other financial institutions should know before they file their 2020 financial statements.
In late March, Congress passed the $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act, which created the PPP program for small businesses. PPP loans may be subject to 100% forgiveness if certain criteria are met. Under current rules, PPP loans may be used to cover the following expenses: payroll, certain employee health care benefits, mortgage interest, rent, utilities, and interest on any other existing debt.
On June 5, President Trump signed the PPP Flexibility Act, which increases the time for PPP loan recipients to spend the funds and still qualify for forgiveness to 24 weeks (up from eight weeks). Among other changes, the new law also lowers the threshold for funds that must be spent on payroll and employee benefits. Under the modified rules, borrowers must spend at least 60% on payroll costs (down from 75%).
Because of the unique nature of PPP loans, the AICPA received numerous inquiries about how the loans should be accounted for. As a result, the AICPA has issued the following guide in the form of Technical Questions and Answers (TQAs):
1. TQA 3200, Long-Term Debt, covers the rules for how borrowers should report PPP loans.
The technical guide explains that the SBA is one of the counter parties to the agreement that will repay the principal and interest on the loan if the borrower meets the conditions for forgiveness. So, payments received from the SBA should be treated similarly to payments received from the borrower.
To forgive or not to forgive?
TQA 2130 also explains accounting requirements during the loan forgiveness process. To qualify for forgiveness, a borrower must complete an application and submit the required documentation to the lending bank. The lender must then issue a decision to the SBA on the loan forgiveness application within 60 days of receiving the application.
If the decision is that the borrower is entitled to forgiveness of some or all of the borrowed funds, the lender must request payment from the SBA at the same time as issuing its decision. Following any review of the loan or loan application, the SBA then remits the forgiveness amount to the bank, plus any interest accrued through the date of payment. This is no later than 90 days after the lender issues its decision to the SBA. After receiving the SBA payment, the lender then notifies the borrower that the loan has been forgiven.
However, if in its review the SBA determines that the borrower wasn’t eligible to receive the PPP loan in the first place, then the loan won’t be eligible for forgiveness. And immediate payment will be required.
What if a borrower doesn’t submit a loan forgiveness application following the PPP requirements after a period of time following the end of the loan forgiveness covered period for the loan? In this situation, the borrower must begin paying principal and interest after that period through the maturity of the loan for the amount that wasn’t forgiven.
Q&A Issued on Forgivable PPP Loans
Also in June, the AICPA issued Q&A Section 3200.18, Long-Term Debt, Borrower Accounting for a Forgivable Loan Received Under the SBA PPP. The non-authoritative guidance discusses how nongovernmental entities, which include nonprofit entities and business entities, may account for a forgivable loan received under the Small Business Administration Paycheck Protection Program (PPP). While the legal form of a PPP loan is debt, it may instead be considered, in substance, a government grant if certain conditions are met.
Accounting for PPP as a Loan
For nongovernmental entities, the entity may account for the PPP loan under FASB ASC 470, Debt, by initially recording the cash flow from the PPP loan as a financial liability and accruing interest in accordance with the interest method under FASB ASC 835-30,Interest—Imputation of Interest. Additional interest is not imputed to reach a market rate since the rate is prescribed by a government agency. The proceeds from the loan would continue to be recorded as a liability until either:
- The loan is partly or wholly forgiven and the debtor has been legally released; or
- The debtor pays off the loan.
If the loan is partially or wholly forgiven, the liability is reduced by the amount forgiven and a gain on extinguishment is recorded when the forgiveness occurs and legal release is received.
Accounting for PPP as a Government Grant
If the PPP loan’s eligibility and loan forgiveness criteria are expected to be met, a not-for-profit entity may account for PPP loans in accordance with FASB ASC 958-605, Not-for-Profit Entities—Revenue Recognition, as a conditional contribution.
Under FASB ASC 958-605, the timing of recognition for a contribution received depends on whether the contribution is conditional or not. If the contribution is conditional, it is not recognized until the conditions are substantially met or explicitly waived. So, a not-for-profit entity would initially record the cash inflow from the PPP loan as a refundable advance. Then, the not-for-profit entity would reduce the refundable advance and recognize the contribution after the conditions of release have been substantially met or explicitly waived.
If a nongovernmental entity that is a business entity expects that it will meet the PPP’s eligibility criteria and concludes that the PPP loan is, in substance, a grant that is expected to be forgiven, it can analogize to the forgivable loan model in IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, to account for the PPP loan. In this case, the initial cash inflow is recorded as a deferred income liability and the government assistance would not be recognized until there is reasonable assurance that any conditions will be met and the assistance will be received. At that point, the earnings impact of the government grants should be recorded systematically over the periods that the entity recognizes as expenses the related costs for which the grants are intended to compensate. Alternatively, the AICPA Q&A states that for situations where the PPP’s eligibility and loan forgiveness criteria are expected to be met, the business entity can also analogize to the guidance in FASB ASC 958-605 or FASB ASC 450-30.
For more information
Borrowers have numerous questions regarding PPP loan forgiveness. At Dugan & Lopatka, we are atop the latest developments and can help with any additional questions that may arise. Click here to contact us.