Assurance Services • Published 10/28/2020 Accounting for PPP Loans and Forgiveness

The Paycheck Protection Program (PPP) was established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), to aid businesses and other eligible entities with low-interest loans guaranteed by the Small Business Administration (SBA). The loans are intended to cover eligible payroll costs, rent, interest, and utilities during the COVID-19 pandemic. Under the program provisions, borrowers may be eligible for forgiveness of the loan if certain criteria are met. Recent guidance has been issued to assist borrowers and lenders with the accounting and financial reporting considerations for PPP loans.

The FASB has not and is not expected to propose new guidance to specifically address PPP loans.

A U.S. GAAP Perspective

The Financial Accounting Standards Board (FASB) is the only standard-setting body with the authority to develop and promulgate U.S. generally accepted accounting principles (U.S. GAAP), which are contained within its Accounting Standards Codification (ASC). At this time, the FASB has not and is not expected to propose new guidance to specifically address PPP loans. Existing guidance is applied to the accounting matters related to this topic.

In June 2020, the AICPA issued two non-authoritative documents under its Technical Question and Answer (TQA) series addressing the borrower and lender considerations, respectively, in accounting for the receipt and forgiveness of PPP loans. As previously mentioned, these TQAs present existing authoritative guidance, applied to PPP loan concerns. Below is a summary of the TQAs issued. The complete TQAs provide more detail.

Accounting for Borrowers

TQA 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program, focuses on the financial reporting options of borrowers who are nongovernmental entities, defined as business entities and not-for-profit (NFP) entities. The guidance is presented under two general alternatives, which can be elected depending on the type of borrower. The funds received can be accounted for as either: (1) debt, or (2) an in-substance government grant. Below is a summary of the accounting treatment under each of the scenarios presented in the TQA.

Debt Model
Nongovernmental Entities (Business Entities and NFPs)
Recognition	Derecognition
Account for the loan as a financial liability in accordance with FASB ASC 470, Debt. Accrue interest in accordance with the interest method under FASB ASC 835-30, Interest: Imputation of Interest. An entity would not impute interest at a market rate (even though the stated interest rate may be below market) because interest rates prescribed by governmental agencies (i.e., SBA) are excluded from the scope of FASB ASC 835-30 guidance on imputing interest.	FASB ASC 405-20-40-1 – proceeds remain recorded as a financial liability until either: the loan is, in whole or in part, forgiven and the debtor has been “legally released,” or the debtor pays off the loan to the creditor. Reduce liability by amount of forgiveness and recognize gain on extinguishment.

The in-substance government grant model provides multiple analogous options for business entities who are not NFPs. NFPs may use the debt model described above, but are otherwise limited to FASB ASC 958-605 if the NFP considers the funds to be an in-substance government grant.

In-Substance Government Grant Model
Business Entities (not NFPs)
By Analogy To	Recognition	Derecognition
International Accounting Standards (IAS) 20 (Government Grants and Assistance)	The cash inflow from the PPP loan is recognized as a deferred income liability.	Reduce the liability, with the offset to earnings as the related costs to which the loan relates are recognized (e.g., payroll expense). The adjustment to earnings is presented either as (1) other income, or (2) a reduction of the related expenses.
FASB ASC 958-605 (Not-For-Profit Entities – Revenue Recognition)	The cash inflow from the PPP loan is recognized as a refundable advance (liability).	Reduce the refundable advance and recognize the contribution once the conditions of release have been substantially met or explicitly waived.
FASB ASC 405-30 (Gain Contingencies)	The cash inflow from the PPP loan is recognized as a liability.	When grant proceeds become realized or realizable, recognize in earnings.
In-Substance Government Grant Model
Not-For-Profit Entities (NFPs)
Standard	Recognition	Derecognition
FASB ASC 958-605 (Not-For-Profit Entities – Revenue Recognition)	The cash inflow from the PPP loan is recognized as a refundable advance (liability).	Reduce the refundable advance and recognize the contribution once the conditions of release have been substantially met or explicitly waived.

Accounting for Lenders

The guidance for lenders was released in June 2020 in a multi-part TQA, 2130.41 through .44.

• TQA 2130.41: Determination of the Effective Interest Rate addresses how lenders are to compute a new effective interest rate for restructured loans (that are not considered troubled debt restructurings, “TDRs”) and include features such as payment deferrals, delays in payment, and extensions of repayment terms. For such loans, the effective interest rate is the rate that equates the amortized cost basis of the loan to the loan’s future contractual payments, with reference to FASB ASC 310-20.
• TQA 2130.42: Classification of Advances Under the Paycheck Protection Program clarifies that lending institutions should account for these advances as loans, not as the pass-through of a government grant. The loans represent a legal instrument with a stated principal, interest, and maturity date.
• TQA 2130.43: Consideration of the SBA Guarantee Under the Paycheck Protection Program establishes that the guarantee from the SBA is not legally detachable as a freestanding financial instrument. As an embedded guarantee that exists as the inception of the loan, the guarantee should be considered when estimating credit losses on the loan under U.S. GAAP, where necessary.
• TQA 2130.44: Accounting for the Loan Origination Fee Received from the SBA addresses how the loan origination fees received from the SBA should be treated. Under FASB ASC 310-20, the fees should be considered nonrefundable loan origination fees, which are offset against loan origination costs and deferred. Net deferred loan origination fees are then amortized over the life of the loan as an adjustment to yield.
  
  FASB ASC 310-20-35-26 allows a creditor to consider estimated prepayments in determining the “life of a loan,” if so done for groups of loans on a pooled basis. Although interpretive, one may reasonably equate principal amounts anticipated to be forgiven by the SBA with loan prepayments, in estimating a loan life for these loans.

Accounting for Governmental Entities

Also in June 2020, the Governmental Accounting Standards Board (GASB) issued GASB Technical Bulletin No. 2020-1: Accounting and Financial Reporting Issues Related to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Coronavirus Diseases. This technical bulletin presents guidance for accounting for various CARES Act funding and financial reporting considerations, including PPP loans. Under the guidance, governmental entities report the loan as a liability until that entity is legally released from the debt. Upon legal release, an inflow of resources is reported in the respective reporting period.

Other Financial Reporting Considerations

Disclosures of accounting policies, including those concerning PPP loans, should identify and describe the accounting principles followed by the entity and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations (FASB ASC 235-10-50-3). Disclosure should include the related impact and the line items impacted in the financial statements.

We Can Help

P&N continues to closely follow all developments in legislation and standards related to COVID-19. For more information on the accounting and reporting considerations for loans obtained under PPP or other matters related to the CARES Act, contact your P&N professional.