Written by Nicole Cradic, CPA, Partner
As a means of aiding the hurting US economy during the COVID-19 pandemic, the CARES Act was signed into law. One significant relief measure of the Act is the Paycheck Protection Program (PPP) which established SBA loans that can be forgiven when certain terms and conditions geared towards employee retention are met. There is widespread awareness and utilization of PPP loans, but numerous questions remain. The AICPA has recently provided guidance on one of them – How should an organization account for the PPP loans? The AICPA’s Center for Plain English Accounting (CPEA) published a special report on this topic entitled “Accounting in the Fog of War – Treatment of PPP Loans”.
It is important to note that there is no guidance in the FASB Codification that exactly fits the terms and conditions of the PPP loans. US GAAP in general is lacking accounting guidance for for-profit entities with respect to government grants. The CPEA’s report provides accounting solutions based on analogizing existing guidance for similar circumstances and referencing to nonauthoritative guidance. Therefore, it is possible that what I am writing could be superseded with more authoritative guidance by the AICPA or the FASB down the road. In the meantime, the guidance from the AICPA’s CPEA is a great resource, especially for entities that need to issue interim or annual financial statements before the ultimate PPP loan forgiveness decision has been communicated.
With respect to for-profit organizations, the CPEA points us to four models to consider for the accounting for PPP loans:
- FASB ASC 958-605 government grant model
- IAS 20 model on government assistance
- FASB ASC 470 debt model
- FASB ASC 430-30 gain model
As a matter of practicality, the first and third models are likely the prevalent choices as they are supported by robust accounting guidance of the US GAAP framework that accountants are already familiar with. The selection of one over the other is dependent on the likelihood of ultimate loan forgiveness. Let’s explore those two models in a bit more detail:
FASB ASC 958-605 Government Grant Model
With this approach, for-profit entities would analogize the accounting treatment with the NPO US GAAP guidance for contributions. Contributions, as defined, can include the cancellation of liabilities. This model is founded on the premise that the substance of the PPP funds is a government grant which is delivered in the form of a forgivable loan. The CPEA report arrives at the recommendation to recognize the PPP loan proceeds into income as eligible expenses are incurred – provided that an entity has high confidence that the PPP loan proceeds will be forgiven. An entity could follow this treatment for the PPP loan portion for which it has high confidence of forgiveness and follow the debt model outlined below for the remainder of the loan proceeds. The journal entries would be as follows:
Upon receipt of the loan proceeds:
| Cash | $XXX,XXX |
| Deferred PPP Grant (Liability Account) | $XXX,XXX |
| To record the receipt of PPP Loan Proceeds |
Upon spending of loan proceeds for eligible costs
| Deferred PPP Grant (Liability Account | $XXX,XXX |
| PPP Grant Income (Other Income Account) | $XXX,XXX |
| To recognize PPP grant income. |
FASB ASC 470 Debt Model
The debt model follows traditional loan accounting. The PPP loan proceeds would be recorded as a liability – like any other bank debt – and interest would also be recorded. Once the entity is legally released as the primary obligor from the creditor, the liability would be derecognized and a gain on “PPP loan extinguishment” would be recorded. An entity could follow this treatment for PPP loans when there is more than a remote likelihood that the loan proceeds will not be forgiven. Here are some of the journal entries that would be recorded – those related to routine interest expense and debt service payments are omitted:
Upon receipt of the loan proceeds:
| Cash | $XXX,XXX |
| PPP Note Payable (Liability Account) | $XXX,XXX |
| To record the receipt of PPP Loan Proceeds |
Upon forgiveness of all or part of the loan:
| PPP Note Payable (Liability Account) | $XXX,XXX |
| Gain on PPP Loan Extinguishment (Other Income Account) | $XXX,XXX |
| To recognize PPP loan principal forgiveness. |
It is highly recommended for you to review the applicable US GAAP provisions for these accounting models in more depth as not all nuances are covered in this high-level summary.
When US GAAP does not provide one exclusive accounting treatment for a transaction, as is the case here, the significant accounting policies footnote should describe the accounting policy that an organization applies.
This summary focuses on the accounting for PPP Loans under US GAAP. Further consideration needs to be given to the accounting for these loans when an entity uses a different basis of accounting. As an example, an entity that is reporting under the income tax basis (ITB) of accounting could not utilize the government grant accounting model noted above. As of the writing of this summary, the PPP loan would need to be presented as debt until legally forgiven. Currently, expenses paid for with loan proceeds are not tax deductible. For ITB financial statements, you would still include those non-deductible expenses.
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