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Accounting for PPP Loan Forgiveness

Posted on September 24, 2020 by

Dave Van Damme

Dave Van Damme

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We have been receiving many questions lately about the PPP loan and forgiveness requirements. Here are some of the most common questions we are hearing from companies:

  • How should we account for the forgiveness of our PPP Loan?
  • The PPP Loan recorded as debt on our balance sheet is causing us to be in violation of covenants with our bank, what should we do?

If you have taken the time to search through the FASB Codification (FASB) for the appropriate US Generally Accepted Accounting Principles (US GAAP) accounting you will find that there is no specific guidance on a for profit entity accounting for a forgivable loan from the government. FASB gives us some direction in the following section:

FASB ASC 105-10-05-2 If the guidance for a transaction or event is not specified within a source of authoritative GAAP for that entity, an entity shall first consider accounting principles for similar transactions or events within a source of authoritative GAAP for that entity and then consider non-authoritative guidance from other sources.

If accounting for the PPP Loan and forgiveness following US GAAP guidance for debt (ASC 470):

  • Recognize the liability and accrue interest over the term of the loan
  • Any amount forgiven is recorded as gain from extinguishment/forgiveness of debt once legally released from the obligation
  • Gain from forgiveness is presented on its own line in the income statement
  • Income statement presentation as either operating income or other income is acceptable since US GAAP does not say where it should be located
  • Cash flow treatment would show the receipt of the PPP loan proceeds as cash from financing activities
  • Amounts forgiven would be a noncash financing activity

If accounting for the PPP Loan and Forgiveness as a Government grant earned through compliance with forgiveness criteria:

IAS 20 from the International Standards:

  • Proceeds received are accounted for as an income grant and recorded as deferred income (a liability)
  • When there is “reasonable assurance” (this is equivalent to “probable” under US GAAP) that the criteria for forgiveness will be met, the deferred income is taken into income on a systematic and rational basis over the periods when the related costs are recognized.
  • IAS 20 states that the income when recognized can be presented as a credit in the income statement under the heading of “Other Income” or a reduction of the related expenses. Because US GAAP would not allow netting against expenses if this method is used, disclosure of line items where the income has been netted would be required in a US GAAP financial statement.
  • The PPP loan proceeds, if using IAS 20 accounting should be classified as cash flows from operating activities since the related costs being defrayed are operating costs.
  • Under IAS 20 there is known diversity in practice and at times the classification of the proceeds as cash flows from financing activities may also be acceptable
  • Disclosures under IAS 20 should include the amount received, the amount included in income and amount deferred, the basis for recognizing deferred amounts, terms and conditions of receipt of the grant, any unfulfilled conditions and any contingent liability that may exist for repayment.

FASB ASC 958-605 from US GAAP:

  • Proceeds received are accounted for as deferred income
  • When  program conditions have been substantially met contribution revenue can be recognized as qualifying expenses are incurred
  • The contribution revenue has to be recognized as a separate revenue line item and cannot offset expenses incurred
  • Cash flow presentation should be cash from operating activities if expected to be forgiven and used for operating expenses like payroll. If a portion is not forgiven (conditions not met) it would be cash from financing activities.

If you are using the AICPA Financial Reporting Framework for Small and Midsized Entities (FRF for SMEs) there is similar guidance to FASB ASC 105-10-05-2 that asks the financial statement preparer to use judgment if there is no specific guidance to address a transaction:

Application of FRF for SMEs Accounting Framework – Principles, Concepts, and Criteria

The task force and AICPA staff have developed the FRF for SMEs accounting framework to address transactions that are typically encountered by private, for-profit, small-, and medium-sized entities. If the framework does not specifically address a transaction, other event, or condition, management should use its judgment and apply the general principles, concepts, and criteria contained in the framework when developing accounting policies. The development and application of those policies should result in financial information that is intended to be consistent with the financial statement concepts described in chapter 1 of Financial Reporting Framework for Small- and Medium-Sized Entities.

Professional judgment may lead you to the accounting options described in IAS 20 or FASB ASC 958-605 for use in the FRF for SME financial statements.

Dave Van Damme

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Leading the firm's advisory & assurance group, Dave supports closely held businesses with audits, financial reporting and fraud analysis.

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