Paycheck Protection Program (PPP) Accounting Guidance Update
Articles by: Richey May, Jul 17, 2020
New guidance was issued in June 2020 by the AICPA on the accounting for Paycheck Protection Program (PPP) loans. The AICPA published Technical Question and Answer (TQA) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program in June 2020 which clarified that businesses may account for the PPP loans in accordance with Financial Accounting Standards Board, Accounting Standards Codification (ASC) 470, Debt or International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, if certain conditions are met.
Under ASC 470, the proceeds received from PPP loans are accounted for as a debt instrument on the balance sheet. The liability would remain until the loan is either 1) forgiven, wholly or in part by the lender or 2) paid in full by the borrower. A debt instrument is considered forgiven only if the borrower is legally released from being the primary obligor. Once a legal release is received from their bank, the business would reduce the liability by the amount forgiven and offset with “Other Income” by recording a gain on extinguishment on the statement of operations.
When applying ASC 470, the business should accrue interest at the stated rate of 1% on a monthly basis. Issuance costs related to acquiring a PPP loan, such as document preparation costs, accounting and legal fees and other external expenses paid to advisors or other third parties should be deferred and amortized over the term of the loan.
Deferred Income Liability
IAS 20 allows for a systemic forgiveness of the PPP loan as eligibility and loan forgiveness criteria are met and the loan forgiveness is probable. The loan under IAS 20 would be recorded on the balance sheet as deferred income liability and would be recognized in “Other Income” on the statement of operations once it is probable the loan will be forgiven. The current guidance also allows for the extinguishment of the liability due to forgiveness to be offset by reduction of expenses that were paid through the use of the funds. While this second option exists, we recommend that offset be made to “Other Income” to maintain consistency in period over period financial metrics comparisons (i.e. Payroll expense, retirement benefits paid, health care expense, rent, etc.).
Lender Electronic Assessment Portal (LEAP)
As of July 1, 2020, there has been no information provided from HUD for the LEAP system as to where they expect the forgiven loan proceeds to be classified.
For more information regarding accounting concerns related to the PPP, please reach out to us. Our accounting team can assist you in understanding the accounting implication of the various stimulus programs available for businesses due to COVID-19.