This is the first in a three part series on CARES Act accounting issues for Paycheck Protection Program (PPP) loans. Part two will cover additional financial accounting and other considerations, and part three will address tax implications.
Many contractors have received loan proceeds through the Small Business Administration’s (SBA) Paycheck Protection Program. Because this program is unprecedented, there are many questions regarding how these loans should be recorded for accounting purposes at inception and in the future.
The American Institute of Certified Public Accountants (AICPA) has worked with the Financial Accounting Standards Board (FASB) to develop Technical Question and Answer (TQA) 3200.18, which aims to provide CARES Act accounting guidance for PPP loans. The TQA is not authoritative. However, it can be used as a guide considering the FASB staff was involved in developing it, and the SEC indicated they would not object to some of the recommendations as long as certain conditions are met.
The following is a summary of the various PPP loan accounting options for contractors, listed in order of those we recommend utilizing.
Option 1: Treat proceeds as a Loan under FASB ASC 470, Debt.
This approach can be used whether the contractor expects to repay the loan or believes it is a grant that will be forgiven. It is the easiest of the methods to adopt as it is applicable in all scenarios.
Accounting steps:
- Record a loan payable and cash receipt when loan proceeds are received. Classify loan as current and long term based on the terms of the loan document.
- Record accrued interest and interest expense on the loan balance throughout the term of the loan in accordance with FASB ASC 835—30. There is no need to impute interest even though the 1 percent rate on the loan is lower than market rates because the loan was made by a government agency, which is outside the scope of ASC 835-30.
- If the loan or portion thereof is forgiven by the SBA, reduce the loan payable for the amount forgiven and record a gain on extinguishment.
- If the loan is not forgiven, either entirely or in part, reduce the loan payable (current and long-term) as the balance is paid off.
Option 2: Treat proceeds as a grant under International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosures of Government Assistance.
Since the FASB does not have any guidance for for-profit entities related to government grants, contractors can analogize to IAS 20 to account for the loan. This method can only be used if the contractor concludes that the loan, in substance, is a grant that is expected to be forgiven.
Accounting steps:
- Record a deferred income liability and cash receipt when the loan proceeds are received.
- When it is probable that the loan will be forgiven, reduce the deferred income liability and record other income or reduce the labor expense or other costs covered by the loan proceeds. Given the program is unprecedented, the probable threshold would be difficult to meet prior to forgiveness being received.
- We do not recommend offsetting the actual expenses. This would impact comparability from year-to-year. In rare circumstances in which there was limited productivity for the costs incurred, netting against the cost may be appropriate.
- If the loan is not forgiven, is only partially forgiven, or you no longer can substantiate that the loan is, in substance, a grant that is expected to be forgiven, utilize change in estimate guidance going forward.
Option 3: Treat proceeds as a gain contingency under FASB ASC 450-30, Gain Contingencies.
Since the FASB does not have any guidance for for-profit entities related to government grants, contractors can analogize to ASC 450-30 to account for the loan. This method can only be used if the contractor concludes that the loan is, in substance, a grant that is expected to be forgiven.
Accounting steps:
- Record a loan payable and cash receipt when the loan proceeds are received.
- Once the grant proceeds are realized and the contingencies related to receipt of assistance have been met, reduce the loan payable and record the gain.
- If the loan is not forgiven, is only partially forgiven, or you no longer can substantiate that the loan is, in substance, a grant that is expected to be forgiven, utilize change in estimate guidance going forward.
Option 4: Treat proceeds as a conditional contribution under FASB ASC 958-605, Revenue Recognition under Not-for-Profit guidance.
Since the FASB does not have any guidance for for-profit entities related to government grants, contractors can analogize to ASC 958-605 to account for the loan. This method can only be used if the contractor concludes that the loan, in substance, is a grant that is expected to be forgiven.
Accounting steps:
- Record a refundable advance liability and cash receipt when the loan proceeds are received.
- Once the conditions of release have been substantially met or explicitly waived, reduce the refundable advance liability and record contribution income.
- If the loan is not forgiven, is only partially forgiven, or you no longer can substantiate that the loan is, in substance, a grant that is expected to be forgiven, utilize change in estimate guidance going forward.
Each of these four options can work under certain circumstances; however, the criteria that needs to be met is high and therefore would require a significant amount of documentation as to how you meet that criteria.
As mentioned earlier, the SEC has indicated they will not object to an SEC registrant accounting for the PPP loan under some of these methods. The methods that they have indicated are acceptable are options one and two.
We recommend option one, as it does not require additional substantiation that you will receive forgiveness. No matter which option you decide to use, you will need to adequately disclose your accounting policy and its impact to the financial statements.
Stay tuned for part two in our series, which will cover additional, financial CARES Act accounting issues and other considerations.
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Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.
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