Presenting the Paycheck Protection Program Loan in Your Year-End Financials

At the start of 2020, no one could have expected what lie ahead. The effects of the global pandemic have touched everyone, including significantly impacting our businesses. In order to best navigate through all the uncertainty, many business owners applied for assistance under the Paycheck Protection Program (PPP) and received funds with the hope and expectation that they will be forgiven by the government. As we continue to wait and see what the forgiveness process will ultimately look like, business owners continue to operate their businesses the best they can, and an important part of that includes preparing both internal and external financial statements. As advisors to our clients, time and time again we are asked the questions: “How do we report the money we received from the PPP?” and “Is this a loan or is this a government grant?”

With that, we would like to outline our suggested best way forward with presenting the PPP loan on your year-end financial statements based on what we know at this time.

Currently, U.S. Generally Accepted Accounting Principles (GAAP) does not have guidance surrounding the proper accounting treatment of a forgivable loan received by a for-profit business from a government entity. However, the AICPA has issued guidance surrounding the acceptable treatments of such a loan as a result of the large amount of businesses who received loan proceeds under the PPP and are now required to report this on interim or year-end financial statements. The AICPA’s guidance allows for a for-profit entity to treat the loan proceeds received under the PPP in one of two ways.

Option 1: Account for the loan as a financial liability in accordance with FASB ASC 470, Debt.

The Company may choose to record the proceeds from the PPP as a loan on the balance sheet in accordance with ASC 470 if they are uncertain whether the full loan or a portion of the loan will be forgiven. If the Company is to record the PPP under the ASC 470, the guidance issued by the AICPA indicates that the following should occur when recording and presenting the debt:

  • Record the cash proceeds received from the PPP loan as a financial liability and accrue interest on the outstanding debt in accordance with ASC 835-30.
  • Do not impute interest on these loans even though the interest rate is below market based on ASC 835-30-15-3(e) which excludes loans from a government agency from such consideration.
  • The PPP proceeds would remain as a liability until the loan is either partially or completely forgiven or the Company makes payments toward the principal and accrued interest on the loan.
  • Once the loan is partially or completely forgiven, the Company would record a gain on extinguishment of debt once they have been legally released from the debt liability.

Option 2: Account for the loan proceeds under International Accounting Standards (IAS) 20.

As mentioned, U.S. GAAP does not currently provide guidance for a for-profit business entity surrounding forgivable loans, therefore the AICPA guidance indicated it was allowable and appropriate to follow IAS 20 to account for the PPP loan. According to the AICPA, if the Company expects to meet all the eligibility requirements of the PPP and receive forgiveness, they are able to recognize the proceeds as a government grant by analogy to IAS 20. The Company would not be able to recognize the grant under IAS 20 until there is reasonable assurance that all of the conditions attached to the government assistance will be met and satisfied. If assurance exists that the Company will meet the criteria, they are able to recognize earnings over a period in which the corresponding expenses have been incurred. Prior to all expenses being incurred, the proceeds would be reported as deferred income and released over time as the qualifying expenses are incurred. The income would be reported in the other income section of the income statement or netted against the corresponding expenses for which the proceeds were utilized.

When considering which option is best for your business, you should consider your unique facts and circumstances and consult with your advisors. Also consider the guidance the Small Business Administration (SBA) has provided to date regarding your loan size.

Here is a quick recap of the SBA guidance provided so far:

The SBA has announced that all loans over $2 million will be subject to review by the Department of Treasury. At this point, the details surrounding the review timing or requirements are not known. When the SBA announced that the Department of Treasury would be reviewing loans in excess of $2 million it was to determine if the loans should have been issued to the Company based on the good faith certification made at the time the Company applied, as well as to review the associated expenses the funds were utilized for. As a result of the clarifications needed surrounding the reviews of loans in excess of $2 million, it makes it harder to determine if the entity will receive forgiveness on all or some of the loan, therefore making reasonable assurance harder to obtain.  Accounting for the loan as debt would be the conservative approach in this circumstance.

At this time, in addition to the Department of Treasury’s review requirements for loans in excess of $2 million, all companies that have received proceeds from the PPP will be required to submit documentation to their lending institution for review by both the lending institution and the SBA. This process will determine who will receive forgiveness under the program. This process is still being updated and, as with most things in 2020, it remains uncertain. While a company may believe they followed all the guidelines set forth by the SBA, it will ultimately be up to the SBA to determine this. While the SBA has announced that all loans in excess of $2 million will be subject to review, the SBA retains the right to review any loan regardless of size.

It is important to consider the appropriate treatment for your company and the effect the recording of the proceeds from the PPP loan can have on your financial covenants with your bank. Therefore, conversations should be had with your bank as soon as possible to proactively address it prior to year-end. An open dialogue with your accountants, banks and other stakeholders is always important, but especially critical in these challenging and uncertain times.

For more information on how to present the PPP loan in your year-end financials, reach out to your Sax advisor or email [email protected].

About the Author

Bill Happe, CPA is a Partner at Sax and primarily focuses on the Construction and Manufacturing & Distribution industries, specializing in industry-specific review, audit and compilation services.  Bill also assists with Employee Benefit Plan Audits and oversees audit and compliance procedures for many of the firm’s largest engagements.  He can be reached at [email protected].

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