From its outset at the end of March 2020, the Paycheck Protection Program (PPP) provided relief to many small businesses and nonprofit organizations, but it also brought a good deal of uncertainty to borrowers. Over the past two months, the Small Business Administration (SBA) slowly began to provide clarification on topics such as who qualifies for the loans, how the money may be used, steps for repayment and guidance on applying for loan forgiveness. Organizations may now be wondering how to account for these transactions in their accounting records.
Entities Planning to Repay PPP Loans
Businesses and nonprofits planning to repay their loans over the two-year repayment period should use FASB ASC 470, Debt, to account for the transactions. Interest should be accrued using the interest method. Although the interest rate is a low 1%, interest does not need to be imputed since the loan is from a government agency. According to U.S. generally accepted accounting principles (U.S. GAAP), the debt should only be removed from the books when the organization is legally released from the debt.
Entities Planning to Apply for PPP Loan Forgiveness
Accounting recommendations for nonprofit organizations and profit organizations differ for those who plan to apply for forgiveness.
If a nonprofit intends to seek forgiveness, the organization would treat the PPP loan as a government grant and follow FASB ASC 958-605 for a conditional grant. For the portion of the PPP loan forgiven, the nonprofit organization would recognize contribution revenue as it incurs qualifying PPP expenses (payroll, rent and utilities). If a portion of the loan will not be forgiven, the nonprofit organization will follow the guidance in FASB ASC 470, Debt, as noted above and accrue for interest under the interest method for the estimated portion of the loan that will be repaid.
Because there is no explicit FASB guidance on government loans that can be forgiven if conditions are satisfied, businesses will need to first look to guidance on similar transactions within a source of authoritative U.S. GAAP and then to nonauthoritative sources, such as other accounting standard setters. As of today, business entities have the following options:
1. FASB ASC 958-605 government grant model
2. IAS 20 model on government assistance
3. FASB ASC 470 debt model
The FASB ASC 958-605 government grant model is appropriate for businesses that have high confidence in their ability to qualify as an eligible recipient and meet the conditions for forgiveness of the loan. Similar to nonprofit organizations, the business will treat forgiveness as a grant income rather than a reduction of expenses.
The IAS 20 model on government assistance may be applied by business entities that are able to assert it is probable they will meet the qualifications and conditions for forgiveness of the loan. The model allows the business the options to record the forgiveness as other income or to reduce the related expenses using a systematic basis over the periods in which the entity recognizes the related expenses for which the grants are intended to compensate.
The FASB ASC 470 debt model is best suited for an entity that is uncertain about meeting the conditions for forgiveness. Businesses utilizing this model would record the PPP loan as a liability upon receipt of the funds and record interest under the interest method similar to any other bank loan or other interest-bearing liability.
Selecting the accounting policy that best aligns with your organization’s situation will aid your business in the application for loan forgiveness. As always the Hantzmon Wiebel team is here to answer questions and provide expert advice on how to best account for the funds received through the PPP loan.