Recently the American Institute of Certified Public Accountants (AICPA) released guidance on accounting and financial reporting for the forgiveness of Paycheck Protection Program (PPP) loans acquired through the Small Business Administration (SBA) as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This guidance was necessary as currently there is no specific guidance in U.S. GAAP that addresses the accounting when a business obtains a loan that is forgivable by a government entity. The AICPA’s guidance indicates there are 4 acceptable options for accounting for PPP loan forgiveness by a business entity, depending on the fact pattern of whether all, a portion, or none of their PPP loan is expected to be forgiven.
If the business determines it will receive no loan forgiveness or only partial loan forgiveness, it should account for the loan in accordance with Accounting Standards Codification (ASC) 470 similar to any other debt obtained by the business. The amounts received under the loan are recognized as debt and if any amounts are ultimately forgiven, the debt is derecognized through the income statement as a gain on the extinguishment of debt only when the business is legally released by the lender.
When the business determines that it does qualify for complete PPP loan forgiveness, there are three options on how to account for it.
First, the business can use International Accounting Standards (IAS) 20, which stipulates that the amounts received under the loan should be reflected as a deferred income liability on the balance sheet and derecognized into income as the business is incurring and recognizing the qualifying payroll and other expenses. Appropriate income statement presentation under this method is either a separate line item within other income or net within the related expense line item (e.g. payroll expense).
Second, the business can use the not-for-profit accounting option described at ASC 958-605. Using this method proceeds from the PPP loan are accounted for as a conditional contribution and recognized as a refundable advance on the balance sheet until the conditions for forgiveness have been substantially met. The derecognition of the liability is reflected as other income on the income statement.
Lastly, a business can use the gain contingency accounting described at ASC 450-30. Using this method proceeds from the PPP loan would be recognized as a liability. A contingent gain is then recognized on the income statement when all uncertainty is removed (i.e., all conditions for forgiveness are met).