The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Paycheck Protection Program (PPP) to provide small businesses with liquidity during the coronavirus pandemic. The program allows for loan forgiveness if the funds are spent on payroll expenses, rent, utilities and certain interest payments. 

 

Questions have arisen as to the proper accounting for the loan proceeds under US GAAP, especially as it relates to the fact that while the legal form of a PPP loan is debt, in substance the program works as a government grant. Multiple accounting models may be available depending upon whether the entity expects to comply with the PPP eligibility and loan forgiveness criteria. The potential accounting models are as follows:

 

Debt model (ASC 470)

As the legal form of a PPP loan is debt, it is always appropriate to account for the loan as debt under ASC 470.  This applies to both for-profit business entities and not-for-profit organizations.  Under the debt model, forgiveness income is recognized when the entity is “legally released” from the obligation. We would expect the “legally released” criteria to be satisfied when all conditions to forgiveness have been met and final approval from the lender and SBA has been obtained.     

 

Government grants (IAS 20)

There is no US GAAP guidance for for-profit business entities that receive government grants, and therefore, it may be appropriate to analogize to International Accounting Standards (IAS) 20, the IFRS accounting standard on accounting for government grants as that standard includes an accounting framework for forgivable loans received from governments.  To elect to account for the loan proceeds under IAS 20, the entity must expect to comply with the PPL eligibility and loan forgiveness criteria. Under IAS 20, forgiveness income is recognized when “reasonable assurance” that forgiveness conditions are met. Income is recognized in the same period(s) in which the corresponding expenses are incurred. While “reasonable assurance” is not defined in IAS 20, it has generally been applied using the same threshold as “probable” in US GAAP (i.e. likely to occur).    

 

Conditional contribution (ASC 958-605)

This US GAAP guidance is specific to not-for-profit (NFP) organizations. If an NFP does not account for the PPP loan under the debt model, then it must account for it under the conditional contribution accounting framework seen in ASC 958-605. This framework is also available for for-profit business entities not accounting for the PPP loan under the debt model, however in practice we have observed the majority of for-profit entities analogizing to and applying the guidance seen in IAS 20 versus the NFP guidance seen in ASC 958-605.  

 

Gain contingency (ASC 450-30)

Under this framework, forgiveness income would not be recognized until realized (i.e. all conditions have been resolved and the company has received the forgiveness). In practice, we have not observed any entities applying this guidance, however the timing of forgiveness income recognition under this guidance would be similar to the debt model.

 

A summary of the two most widely used accounting models, the debt model and government grants under IAS 20, is as follows: 

 

 

Debt (ASC 740)

Government Grant (IAS 20)

Balance sheet presentation of loan proceeds

Debt

Deferred income liability (outside of debt)

Timing of forgiveness recognition

When "legally released” from the obligation

When "reasonable assurance" that forgiveness conditions are met, recognize income in the same period(s) in which the corresponding expenses are incurred

Income statement classification of forgiveness income

Other income (outside of operating income)

Other income (in or outside of operating income) or as a reduction to the related expenses

Cash flow statement

Classify proceeds within financing activities and disclose forgiveness income as a non-cash financing activity

Classify proceeds within operating activities (financing is also acceptable)

   

Please contact a member of your Boulay client service team or contact us at 952.893.9320 or learnmore@BoulayGroup.com for more information on the accounting for PPP loan proceeds.