The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the US economy, including $349 billion that was earmarked for the Paycheck Protection Program (PPP) to be administered by the SBA. An additional $310 billion was later authorized for the PPP.
Under the PPP, eligible small businesses can apply to an SBA approved lender for a loan that does not require collateral or personal guarantees. The loans have a 1% fixed interest rate and are due in two years. However, they are eligible for forgiveness (in full or in part, including any accrued interest) under certain conditions.
Accounting for the PPP loan and anticipated forgiveness is an enormously interesting question. The U.S. Generally Accepted Accounting Principles (USGAAP) does not address government grants to for-profit entities. As a result, we are left to analogize to other USGAAP, or as in this case, to the International Financial Reporting Standards (IFRS), which does address such grants in IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.
Because the legal form of a PPP loan is debt, it will always be appropriate for an entity that receives such a loan to account for it as debt under Accounting Standards Codification (ASC) 470, regardless of whether the entity expects the loan to be forgiven. However, an entity that expects to meet the PPP’s eligibility and loan forgiveness criteria may elect to account for the proceeds as akin to a government grant. An entity that does not expect to meet the PPP eligibility and loan forgiveness criteria must account for the proceeds as debt.
If an entity expects to comply with the PPP eligibility and loan forgiveness criteria, it may account for the forgivable PPP loan as, in substance, a government grant that is earned through the entity’s compliance with the loan forgiveness criteria.
Under IAS 20, PPP proceeds received would be accounted for as an income grant. A deferred income liability would be recognized upon receipt of the forgivable loan, if it is determined that there is “reasonable assurance” that it will meet the conditions for forgiveness of the full loan amount. The deferred income liability would be recognized in income on a systematic and rational basis over the periods in which the entity recognizes as expenses the costs the grant is intended to defray.
IAS 20 provides that grants related to income can be presented as (1) a credit in the income statement, either separately or under a general heading, such as “other income,” or (2) a reduction to the related expense.
Under accounting standard ASC 470, an entity would recognize a liability for the full amount of PPP proceeds received and accrue interest over the term of the loan. The entity would not impute additional interest at a market rate because the guidance on imputing interest in ASC 835-30 excludes transactions where interest rates are prescribed by a government agency (e.g., government-guaranteed obligations).
If any amount is ultimately forgiven (i.e., the entity is legally released from being the loan’s primary obligor in accordance with ASC 405-20), income from the extinguishment of the liability would be recognized in the income statement as a gain on loan extinguishment.
If your company does not have a fiscal year ending in May, June or July, but report much later in year, the ultimate resolution of your forgiveness will be known. One would then just decide to follow the “debt” approach and have gain on extinguishment or follow IAS 20 and either offset the related expenses or as a gain.
For those who will be reporting before the forgiveness process is completed will need to assess the likelihood of obtaining forgiveness and account as appropriate.
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