On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law to help stabilize the economic impact of the COVID-19 pandemic. One of the key components of the CARES Act was the Paycheck Protection Program (PPP). One of the most appealing attributes of the PPP loan program is the forgiveness provision. Recipients of PPP loans will be eligible for loan forgiveness for costs incurred and payments made for payroll, covered rent obligations, covered utility payments, and interest on covered mortgage obligations, occurring during the eight-week period commencing on the disbursement date of the loan. A summary of the key aspects of the PPP loan program and more information on the PPP loan forgiveness provisions can be found here.
While the PPP loan program provided expedited funds to help struggling small businesses, many questions about the PPP program were left unanswered, such as the accounting and financial reporting of the PPP loan forgiveness provisions. On May 13, 2020, the American Institute of Certified Public Accountants (AICPA) Center for Plain English Accounting (CPEA) released a Special Report drawing attention to the fact that while existing U.S. Generally Accepted Accounting Principles (U.S. GAAP) provides guidance for the way a not-for-profit organization would account for the forgiveness of a loan, assuming all conditions are met, it does not explicitly address the accounting and financial reporting guidance that other types of business entities should follow. The CPEA pointed out that its opinions expressed in the Special Report should not be viewed as official positions of the AICPA. However, it did provide non-authoritative guidance in the Special Report to help business entities consider their options for the accounting and financial reporting of the PPP loan forgiveness provisions. The remainder of this Insight is a summary of those options.
What Is the Accounting Treatment for PPP Loan Forgiveness for a Not-for-Profit (NFP) Organization?
If an NFP organization intends to seek forgiveness of a PPP loan, the CPEA believes that NFP recipients should treat PPP loans as government grants (i.e. the Government Grant Model).(a) Existing U.S. GAAP notes that for NFP organizations, the grantor conditions should be substantially met by the entity before the receipt of assets (including contributions receivable) is recognized as contribution revenue. A transfer of assets that is a conditional contribution should be accounted for as a refundable advance (liability) until the conditions have been substantially met or explicitly waived by the donor. However, in cases where conditions are met over time or in stages, contribution revenue should be recognized as the qualifying expenses are incurred. Accordingly, as a general matter, a recipient NFP organization would recognize contribution revenue as it incurs qualifying PPP expenses (including payroll, rent, utilities), assuming conditions are “substantially met.” If an NFP organization determines that a certain portion of the PPP loan will not be forgiven or otherwise intends to repay the PPP loan, the NFP organization should accrue interest for the portion estimated to be repaid.
What Is the Accounting Treatment for PPP Loan Forgiveness for a Business Entity (not an NFP)?
The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) indicates that in the absence of specific guidance in U.S. GAAP, an entity should consider accounting principles for similar transactions or events within a source of authoritative U.S. GAAP, and then consider nonauthoritative guidance from other sources.
“Government Grant Model” – While existing U.S. GAAP provides guidance on transfers of assets from government entities to NFP organizations, it does not apply to business entities that are not an NFP organization. Given the lack of authoritative guidance for business entities, it would be appropriate to turn to authoritative guidance for similar transactions. The first option to consider would be the Government Grant Model covered in the previous question, which only applies to NFP organizations. The CPEA indicated that business entities that choose to apply this model should have high confidence in their ability to qualify as an eligible recipient and meet the conditions for forgiveness of the loan and, thus, will be able to conclude that conditions regarding qualification, certification, and qualifying expenses, and any other Small Business Administration PPP loan program conditions have been “substantially met.” In these circumstances, the business entity would not be materially different from an NFP, and justification could be established for the entity to recognize the loan forgiveness based on the model. As such, a non-NFP business entity, as a general matter, would recognize contribution revenue as it incurs qualifying PPP expenses (including payroll, rent, and utilities), assuming conditions are “substantially met.” The CPEA indicated that a business entity or NFP would not be required to label it “contribution revenue” in the income statement. As an alternative, it could use wording such as “PPP loan forgiveness” or “PPP grant.” Under this model, the CPEA believes it would not be appropriate to present the contribution revenue as an offset of expenses.
International Model – Alternatively, a non-NFP business entity could consider following similar international accounting standards,(b) not a part of U.S. GAAP, but would be considered a non-authoritative source of accounting guidance. International standards indicate that a forgivable loan from the government is treated as a governmental grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan. The international guidance outlines a capital approach (related to asset acquisition) and an income approach (generally related to expenses). A PPP loan under international standards would likely be accounted for under the income approach, assuming the PPP forgiveness conditions are met. Under the income approach, government grants shall be recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. International standards allow presentation flexibility regarding amounts recognized in the income statement, indicating that government grants related to income are presented as part of profit or loss, either separately or under a general heading such as “other income.” Alternatively, they can be reported as a deduction from the related expense. Thus, in the case of a PPP loan, the entity could choose to present forgiveness as other income or as an offset to payroll expense (or other qualifying expenses).
Debt Model – Alternatively, a business entity could consider using the debt model to account for the PPP loan. This model would be more appropriate for a business entity that determines that there will only be a remote possibility of meeting the necessary conditions for PPP loan forgiveness. The business entity would record the PPP loan as a liability upon receipt of the funds, and record interest similar to any other bank loan or other interest-bearing liability.
Gain Contingency Model – Alternatively, a business entity could consider the gain contingency model. Using this approach, a business entity would not recognize a contingent gain in the financial statements, as doing so could recognize revenue before its realization. Therefore, the forgiveness of a PPP loan would not be recognized until all uncertainties regarding the final forgiveness have been resolved.
Absent authoritative guidance in U.S. GAAP, the CPEA concludes that the selection of the appropriate accounting policy is a function of management’s intent to seek forgiveness of the PPP loan, ability to meet conditions of forgiveness, and willingness to address uncertainties in qualifications. Therefore, the ultimate selection of the appropriate accounting policy for PPP loan forgiveness will depend upon the unique circumstances of a business entity, based upon authoritative and/or non-authoritative guidance for similar transactions.
PYA will be helping our clients with the PPP loan forgiveness provisions. If you need assistance or would like additional PPP loan guidance, visit our COVID-19 hub, or contact one of our PYA executives below at (800) 270-9629.
*Disclaimer: The information above is only a non-exhaustive summary of the AICPA CPEA Special Report.
a. Government grants to NFP entities are addressed in FASB ASC 958-605-15-5.
b. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance