A nongovernmental entity may account for a Paycheck Protection Program (PPP) loan as a financial liability in accordance with FASB ASC Topic 470, Debt, or under other models, if certain conditions are met, according to new guidance for borrowers issued Wednesday by the AICPA.
The AICPA worked with many of its volunteer members, and also the FASB staff, to develop Technical Question and Answer (TQA) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program. Additionally, the SEC staff shared its views in indicating it would not object to an SEC registrant accounting for a PPP loan under Topic 470 or as a government grant by analogy to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, provided certain conditions are met.
The TQA addresses accounting for nongovernmental entities only (which include business entities and not-for-profit entities (NFPs)). The TQA explains that an entity accounting for the PPP loan under Topic 470:
- Would initially record the cash inflow from the PPP loan as a financial liability and would accrue interest in accordance with the interest method under ASC Subtopic 835-30.
- Would not impute additional interest at a market rate.
- Would 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.
- Would reduce the liability by the amount forgiven and record a gain on extinguishment once the loan is partly or wholly forgiven and legal release is received.
According to the TQA, if a nongovernmental entity that is not an NFP (that is, it is a business entity) expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may analogize to IAS 20 to account for the PPP loan. An entity accounting by analogy to IAS 20 would not be able to recognize government assistance until there is reasonable assurance that any conditions attached to the assistance will be met and the assistance will be received.
Once there is reasonable assurance that the conditions will be met, the earnings impact of the government grants would be 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.
The TQA also states that in situations in which the PPP’s eligibility and loan forgiveness criteria are expected to be met:
- A business entity can also analogize to the guidance in ASC Subtopic 958-605 or ASC Subtopic 450-30.
- An NFP should account for such PPP loans in accordance with ASC Subtopic 958-605 as a conditional contribution.
A table included in the TQA summarizes the key concepts of these models.
Congress established the PPP to provide relief to small businesses during the coronavirus pandemic as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The legislation authorized Treasury to use the SBA’s 7(a) small business lending program to fund loans of up to $10 million per borrower that qualifying businesses could spend to cover payroll, mortgage interest, rent, and utilities.
PPP funds are available to small businesses that were in operation on Feb. 15 with 500 or fewer employees, including tax-exempt not-for-profits, veterans’ organizations, Tribal concerns, self-employed individuals, sole proprietorships, and independent contractors. Businesses with more than 500 employees also can apply for loans in certain situations.
The AICPA’s SBA Paycheck Protection Program Resources for CPAs pagehouses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.
For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA’s coronavirus resources page.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.