June 12, 2020
The TQA states that a nongovernmental entity (business entity or not for profit (NFP) organization) may account for a Paycheck Protection Program (PPP) loan as a financial liability in accordance with
FASB ASC Topic 470, Debt. Other models can be used if certain conditions are met.
According to an article in the Journal of Accountancy, the TQA only addresses accounting for nongovernmental entities. A nongovernmental entity:
- Would initially record the cash inflow from the PPP loan as a financial liability and would accrue interest in accordance with the interest method under ASC Subtopic 835-30.
- Would not impute additional interest at a market rate.
- Would continue to record the proceeds from the loan as a liability until either (1) the loan is partly or wholly forgiven, and the debtor has been legally released or (2) the debtor pays off the loan.
- Would reduce the liability by the amount forgiven and record a gain on extinguishment once the loan is partly or wholly forgiven and legal release is received.
According to the TQA, if a nongovernmental entity that is not an NFP expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may analogize to
IAS 20 to account for the PPP loan. An entity accounting by analogy to IAS 20 would not be able to recognize government assistance until there is reasonable assurance that any conditions attached to the assistance will be met and the assistance will be received.
Once there is reasonable assurance that the conditions will be met, the earnings impact of the government grants would be recorded 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.
The TQA also states that in situations in which the PPP’s eligibility and loan forgiveness criteria are expected to be met a business entity can also analogize to the guidance in
ASC Subtopic 958-605 or ASC Subtopic 450-30.
FASB ASC 450-30 outlines a model for gain contingency recognition. Under this model, the earnings impact of a gain contingency is recognized when all the contingencies related to receipt of the assistance have been met and the gain is realized or realizable. As applied to forgivable loans received under the PPP, a business entity would initially record the cash inflow from the PPP loan as a liability. The proceeds from the loan would remain recorded as a liability until the grant proceeds are realized or realizable, at which time the earnings impact would be recognized.
An NFP should account for such PPP loans in accordance with
ASC Subtopic 958-605 as a conditional contribution. FASB ASC 958-605 addresses the accounting for contributions by NFPs. Although the scope of FASB ASC 958-605 excludes contributions made by governmental entities to business (for-profit) entities, the FASB staff has acknowledged that entities scoped out of that guidance are not precluded from applying it by analogy when appropriate. Under this model, the timing of recognition for a contribution received depends on whether the contribution is conditional or not. If conditional, the contribution is not recognized until the conditions are substantially met or explicitly waived. Specifically, a nongovernmental entity would initially record the cash inflow from the PPP loan as a refundable advance. The nongovernmental entity would then reduce the refundable advance and recognize the contribution once the conditions of release have been substantially met or explicitly waived.
Stay safe,
Matt Boland, CPA
Director - Accounting and Assurance
McCarthy & Company
Source: AICPA issues guidance on accounting for forgivable PPP loans. Ken Tysiac. Journal of Accountancy. June 10, 2020.
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
