As businesses obtain approval and receive funds under the PPP program, there is seemingly no limit to the challenges and questions that follow. After making sure documentation is in place to support the financial need certification, implementing a system to track qualified expenses, and checking on the most recent update on the ever-evolving forgiveness rules, eventually, the question is asked how to account for the funds under U.S. Generally Accepted Accounting Principles (GAAP). On May 13, 2020, the AICPA, through the Center for Plain English Accounting (CPEA), released a report (“Accounting in the Fog of War – Treatment of PPP Loans”) to provide clarification on the accounting considerations.
Although the report is non-authoritative guidance, the CPEA is the AICPA’s national accounting and auditing resource center for local and regional firms, and Barnes Dennig Director and Assurance Line Leader, Tom Groskopf, serves as its technical director and authored the report.
While there are several nuances to consider in the accounting that could impact the treatment and judgments that may been to be made by management, there are some overarching scenarios to review.
Scenario 1 – The Loan is Intended to be Repaid
If repayment is expected, the loan should be accounted for consistent with other debt arrangements (FASB ASC 470) and reported as a loan payable. If facts and circumstances change and partial or total forgiveness is obtained, the gain on extinguishment is recognized once the company is legally released as the primary obligor of the debt.
Scenario 2 – Partial or Total Forgiveness is Anticipated – Entity is a Not-For-Profit Entity
If partial or total forgiveness is anticipated for a not-for-profit (NFP), the report recommends accounting for the funds similar to other government grants under FASB ASC 958-605. Due to the forgiveness being conditional on incurring the qualified expenses (among meeting other criteria), the funds will be initially accounted for as a refundable advance and will generally be recognized into contribution revenue as the qualified expenses are incurred. A key consideration in this treatment is that contribution revenue is only recognized as the conditions of the program are “substantially met;” for the portion in which forgiveness is not expected, no revenue should be recognized and interest will be accrued on the advance.
Scenario 3 – Partial or Total Forgiveness is Anticipated – Entity not a Not-For-Profit Entity
The CPEA report makes clear that under U.S. GAAP there is no explicit guidance on how a business entity (Not a NFP) should account for government grants. The report recommends three options available to these entities for consideration:
- Accounting for the funds as debt, consistent with scenario 1, with any forgiveness recognized as income once the company is legally released as the primary obligor of the debt.
- Accounting for the funds as a government grant, consistent with scenario 2, with income (contribution income), recognized as qualified expenses are incurred and conditions of the program are substantially met.
- Accounting for the funds as Government Assistance under the International Accounting Standards (IAS) 20 model. Under this model the funds are recognized when “there is reasonable assurance that the entity will comply with the conditions” of the program and will be recognized on a systematic basis over the period in which the related expenses are incurred. Under this model, unlike the FASB accounting for government grants, the funds can be recognized into other income or can be recorded as a reduction to expenses.
In the absence of explicit guidance, business entities have flexibility in the above options. While similar in the fact that each option results in the forgiveness amount ultimately resulting in favorable recognition on the income statement, each can result in different timing of recognition as well as different classification on the income statement (e.g. other income versus offset to expenses) as well as the balance sheet (e.g. debt versus refundable advances). Each company should consider their fact pattern, the confidence level in obtaining forgiveness, and impacts on financial statement ratios and financial covenants when making this determination.
While the report provides much-needed guidance on the accounting for the funds under the PPP program, the resulting treatment will not be consistent from entity to entity, and in some cases, will require management to select an appropriate accounting policy. Given the fact-specific considerations, we recommend reaching out to your Barnes Dennig Accounting Team Member for assistance.
Barnes Dennig COVID-19 Advisory Team Leaders:
- Scott Cress – firstname.lastname@example.org
- Cheryl Ganim – email@example.com
- Andy Bertke – firstname.lastname@example.org
- Matt Rosen – email@example.com
- Jennifer Wesselman – firstname.lastname@example.org
Given the size and complexity and scale of the government’s response to the pandemic and the fact that the legislation was passed quickly, more guidance is needed and being published almost daily. The information on this page is subject to change.