The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides relief for certain qualified entities in the form of guaranteed loans offered under the Paycheck Protection Program (PPP). These “PPP loans” will be partially forgiven so long as borrowers meet certain conditions.
U.S. Generally Accepted Accounting Principles (GAAP) do not offer specific guidance for forgivable loans issued by a government entity. However, three accounting models may offer a basis for accounting for the forgivable portion of PPP loans by analogy.
PPP loan forgiveness requirements
According to the U.S. Small Business Administration (SBA), loans may be fully forgiven if funds are used for:
- Payroll costs.
- Interest on mortgages.
- Rent.
- Utilities.
At least 75% of the forgiven amount must have been used for payroll. Importantly, PPP loan forgiveness is based on the entity maintaining or quickly rehiring its employees while preserving salary levels. Should the entity’s full-time headcount decline, or if salaries and wages decrease, the forgiveness will be reduced.
3 models for accounting forgivable PPP loan by analogy
Without specific U.S. GAAP guidance for government-issued forgivable loans, business entities may select one of three appropriate models for accounting by analogy.
Under the CARES Act, government assistance may be referred to as a grant, credit or loan.
Entities should carefully consider the form and substance of the assistance to best determine the appropriate model to use. The selection of the model will dictate the timing of any income recognition as well as the presentation on the balance sheet, income statement and statement of cash flows.
The models follow:
- Treat forgivable portion as debt extinguishment under ASC 470: The forgivable portion would not be derecognized unless and until the entity is “legally released from being the primary obligor under the liability,” at which time an extinguishment gain would be recognized.
- Treat forgivable portion as a contingent gain under ASC 450: The forgivable portion would be recognized as a gain once all uncertainties are resolved and income is realizable.
- Treat forgivable portion as a government grant, analogized to IAS 20: IAS 20 is commonly applied by analogy for the treatment of government grants under U.S. GAAP. The forgivable portion may be recognized once there is reasonable assurance the recipient will comply with the conditions associated with the grant.
Keep in mind that each model has a unique set of rules and requirements, such as the level of assertion by management that the necessary requirements for forgiveness have or will be met. Guidance from the SBA is still evolving, so entities should choose a model that they and their auditors are most comfortable with.
Get in touch with us today to discuss the accounting, reporting and tax requirements for your PPP loan.
Please reach out to Josh Vernie, Partner, (585-748-3687 or jverni@cfgi.com) directly if you would like any specific guidance on how to account for the PPP loans.