The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted to help protect businesses and employees during the COVID-19 pandemic. Included in the CARES Act is the Paycheck Protection Program (PPP), which enables the Small Business Administration (SBA) to guarantee low-interest rate loans to certain entities. The PPP loans may be partially or fully forgiven if employees are retained and funds are used for eligible expenses.
Currently, the Accounting Standards Codification (ASC) issued by the Financial Accounting Standards Board (FASB) does not contain specific guidance on the financial reporting of PPP loans. In absence of specific guidance, FASB advises that entities should consider guidance on similar transactions or circumstances or guidance from other non-authoritative sources. The following is a summary of similar guidance.
FASB ASC 958-605: Government Grant Model
Nonprofit organizations should use the guidance in FASB ASC 958-605. This guidance applies to governmental grants, and the timing of recognition of funds received is dependent on if contributions are conditional or unconditional. Because the funds received from a PPP loan are conditional for the use of eligible expenses, a nonprofit organization would record the initial funds received as a refundable advance. To the extent that an entity determines forgiveness of PPP loans is an administrative function, contribution revenue would then be recognized as qualifying PPP expenses are incurred.
As there is no direct guidance for business entities in the FASB ASC, business entities may also consider this guidance that traditionally applied to nonprofit organizations.
FASB ASC 450-30: Gain Contingencies
Under FASB ASC 450-30, forgiveness is not recognized until all uncertainties related to the forgiveness is resolved. Generally, all uncertainties being resolved would not be met until the final forgiveness is issued by the government. FASB ASC 450-30 is less specific on the measurement and recognition requirements compared to other related PPP loan guidance, and as such is not preferred by most entities.
FASB ASC 470: Debt
Under this model, entities record PPP loans as debt. Interest is recorded the same as any other loan. Extinguishment of the debt is recognized when the debt has been legally released.
IAS 20: Government Grant Accounting and Disclosure
IAS 20 is nonuthoritative as it is not a part of the FASB ASC; however, FASB ASC 104-10-05-2 permits non-authoritative guidance when no guidance for transactions is covered in the FASB ASC. IAS is often used because it applies to government grants to for-profit entities, which is more akin to a PPP loan. The income from the PPP loan is recognized when there is reasonable assurance that the entity will meet the terms of the loan. IAS does not define the term “reasonable assurance,” but it is generally considered to have the same definition as “probable” in U.S. GAAP. Income is then recognized systematically as entities recognize eligible PPP expenses.
PPP loan proceeds should be recorded on the balance sheet for business entities or the statement of financial position for nonprofit entities as a liability, either current or long-term based on maturity.
Under most guidance, PPP loan forgiveness is presented as a separate component of income on the statement of operations for business entities or the statement of activities for nonprofit organizations. IAS 20 is more flexible on how the income is reported. It may be reported as a separate component of income, or it may be shown as a reduction to the qualifying expenses.
Entities must use judgment to determine if PPP loan activity should be recorded through operating or financing activities. Many entities believe the purpose of PPP loans is for operating expenses, and as such, proceeds should be recorded as an operating inflow. Others believe PPP loans are forgivable loans; and therefore, the proceeds should be shown as a financing activity. Both approaches are likely acceptable to the extent that the PPP loan forgiveness has been recognized. Any portion of a PPP loan that has not been forgiven should be shown as a financing inflow.
Nonprofit organizations or business organizations that have elected to follow FASB ASC 958-605 should make the following disclosures: the total of the amounts promised; and a description and amount for each group of promises having similar characteristics, such as amounts of promises conditioned on establishing new programs, completing a new building, and raising matching gifts by a specified date.
Business entities following FASB ASC 470 would make similar disclosures as they would on any other debt. FASB ASC 450-30 is not specific in terms of disclosure requirements. Business entities utilizing IAS 20 should make the following disclosures: the accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements; the nature and extent of government grants recognized in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited; and unfulfilled conditions and other contingencies attaching to government assistance that have been recognized.
While FASB accounting standards codification might not have specific guidance to address how PPP loan forgiveness should be accounted for, there is similar guidance that entities may utilize in their financial reporting of PPP loan forgiveness.
Click here to view the article in the September/October issue of The Asset, the Official publication of the Missouri Society of Certified Public Accountants.