While much attention has been given to the PPP loan program, including the effects on the lenders, many borrowers have posed questions on how to record the loan and related forgiveness. The Financial Accounting Standards Board has provided some clarity on the issue to help borrowers record and report the transaction appropriately. Borrowers with financial statements that include footnotes should disclose in the accounting policy section the method selected as well as include relevant footnote information that is consistent to the policy selected. See below for a summary of the options available.
Options available to both business entities and not-for-profits
The borrower could account for the transaction as debt under FASB Accounting Standards Codification (ASC) 470, Debt. Under this method, the borrower would record the amount received from the program as debt and accrue interest at the stated rate (1%). The borrower should not impute additional interest to account for the difference between the stated rate and the market rate. This is due to transactions where interest rates are prescribed by governmental agencies are excluded from the guidance in FASB 836-30 on imputing interest. The loan would remain as a liability until either 1) the loan is, in part or wholly, forgiven and the debtor has been “legally released” or 2) the debor pays off the loan to the creditor. Once the loan is, in part or wholly, forgiven and legal release is received, a nongovernmental entity would reduce the liability by the amount forgiven and record a gain on extinguishment.
Business entities that are not classified as not-for-profits can also adopt guidance that non-for-profits would adopt for these transactions. The guidance is addressed in FASB ASC 958-605. Under this guidance, the borrower would record the inflow as a refundable advance (i.e. conditional contribution). The borrower would then reduce the refundable advance and recognize the contribution once the conditions of release have been substantially met or explicitly waived.
Options available to both business entities only (not-for profits are excluded)
Borrowers have the option of accounting for the inflow under guidance contained in IAS (International Accounting Standards) 20 as a governmental grant. The borrower would account for the cash inflow from the loan as a deferred revenue liability. Once there is reasonable assurance (similar to the “probable” threshold in U.S. generally accounted principles) that the conditions will be met, the liability would be reduced with an offset to earnings on a systemic basis over the periods in which the grant related cost are incurred. In the income statement the amount would be recorded as a credit to “other income” or a reduction to related expenses (such as compensation expense – costs in which were incurred in related to obtaining the loan/grant).
Borrowers also have the option of following guidance in FASB ASC 450-30, which is the 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.
Please contact a Brady Martz financial institution team member with additional questions. Our team is here to help.