By: Daniel Harris
As of and for the year ended December 31, 2020 there will be diversity in practice as it relates to the accounting treatment a for profit business elects to apply to forgivable loans received during 2020 under the Small Business Administration Paycheck Protection Program (PPP). Although legally a PPP loan is considered debt, many business owners believe the PPP loan, in substance, is a government grant.
Accounting Principles Generally Accepted in the United States of America (U.S. GAAP) does not have specific authoritative guidance as it relates to a for profit business and accounting for government grants. As a result, the following two accounting models are acceptable under U.S. GAAP before forgiveness of the PPP loan is received:
1. Treat the PPP loan as debt in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 470, Debt. If treated as debt, a liability would be recognized on the balance sheet and classified according to the nature of the current and long-term portions. The PPP loan would remain on the balance sheet until formal forgiveness is received and the debt is legally released, or, until the PPP loan is repaid. Interest should be accrued in accordance with the interest method under FASB ASC 835, Interest.
2. To the extent management believes the PPP loan is in substance a government grant and they have met the conditions for forgiveness, they may be able to analogize to non-authoritative guidance included in FASB ASC 958, Not-for-Profit Entities (FASB ASC 958)and recognize income to the extent they have met the conditions for forgiveness (i.e. prior to receipt of legal release or formal forgiveness) during the year ended December 31, 2020. To the extent the conditions for forgiveness for the full amount has not been met, the remainder would be recorded as a liability as of December 31, 2020.
Note – For a Not for Profit – Model 1 above can be used or Refer to ASC 958, Not for Profit Entities (ASC 958) which can result in a similar answer to Model 2.
Whichever model is selected, appropriate financial statement disclosures are required.
Reynolds + Rowella is following COVID-19 tax and accounting guidance closely and will continue to keep you informed as a trusted advisor during this time. For more information on borrower accounting for PPP loans as well as the overall impact of COVID-19 on estimates of credit losses please contact Dan Harris.
About Reynolds + Rowella
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.
Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.