Accounting for PPP Loan Forgiveness

30 Jun 2020

The AICPA issued technical guidance for accounting for a Paycheck Protection Program (“PPP”) loan for nongovernmental entities (including not-for-profit entities).

The guidance suggested that a nongovernmental entity (including not-for-profits, “NFP”) may account for the PPP loan as a financial liability in accordance with FASB ASC 470, Debt, if certain conditions are met. In addition, the guidance suggested that a nongovernmental NFP may account for the PPP loan as a conditional grant/contribution in accordance with FASB ASC 958-605, Not-for-Profit Entities: Revenue Recognition, if certain conditions are met.

Debt

Conditions – Whether or not the nongovernmental entity anticipates having to repay the PPP loan, or believes that the PPP loan represents a grant that is expected to be forgiven, it may account for the PPP loan, in accordance with FASB ASC 470, as a financial liability (debt).

Initial Measurement – Proceeds from the PPP loan would get recorded, in accordance with FASB ASC 470, Debt, as an increase in both cash and a financial liability (debt).

Subsequent Measurement – Interest should get recorded in accordance with FASB ASC 835-30, Interest: Imputation of Interest. Interest expense should get recorded at the stated (not market) interest rate.

Derecognition of Liability – The debt will be considered extinguished, in accordance with FASB ASC 405-20, Liabilities: Extinguishments of Liabilities, once the debtor has been “legally released” as the primary obligor or the debtor satisfies the outstanding balance of the debt. Once the debt is extinguished, the liability would be eliminated and a gain on extinguishment recorded.

Example

An NFP received $500,000 in PPP funding on May 1st, 2020. The terms of the funding agreement indicate that the NFP must utilize the proceeds to fund/offset qualifying expenses over a twenty-four-week period. The terms of the agreement specify that the NFP must repay the principal of the loan back plus interest, which accrues at 1% semi-annually, matures in two years ($500,000 times 1% = $5,000 times 2 years = $10,000 total interest expense). Upon maturity, the loan (and accrued interest payable) may be forgiven if the NFP fulfills the agreed-to terms. The regulations state that the transaction should be recorded as a debt. The following are examples of how to record the transactions: Initial Measurement (on May 1, 2020) –

Conditional Contribution

Conditions – If the NFP entity expects to meet the PPP loan’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may account for the PPP loan, in accordance with FASB ASC 958-605, Not-for-Profit Entities: Revenue Recognition, as a conditional contribution.

Initial Measurement – A transfer of assets that is a conditional contribution should be accounted for, in accordance with FASB ASC 958-605, Not-for-Profit Entities: Revenue Recognition, as an increase in both cash and a refundable advance (debt) until the conditions are met or explicitly waived by the grantor.

Subsequent Measurement and Derecognition of Liability – Where conditions are met over time or in stages, contribution or grant revenue should be recognized as the matching expenses are incurred. The refundable advance should be reduced by the amount of the contribution/grant revenue recorded. FASB ASC 958-605-21 provides additional guidance on recognition over time or in stages. In addition, many sources suggest that, when a determination is made that the PPP loans should be treated as conditional contributions, the PPP loans should be considered cost reimbursement government grants. FASB ASC 958-605 sections 55-70E through 70F provide additional guidance/examples of revenue recognition for cost reimbursement grants.

Example

An NFP received $500,000 in PPP funding on May 1st, 2020. The terms of the funding agreement indicate that the NFP must utilize the proceeds to fund/offset qualifying expenses over a twenty-four-week period. The terms of the agreement specify that the NFP must repay the principal of the loan back plus interest, which accrues at 1% semi-annually, matures in two years ($500,000 times 1% = $5,000 times 2 years = $10,000 total interest expense). Upon maturity, the loan (and accrued interest payable) may be forgiven if the NFP fulfills the agreed to terms. The NFP’s management has determined the transaction should be recorded as a conditional contribution. The following are examples of how to record the transactions, and assumes expenses are incurred at a rate of $62,500 per week: Initial Measurement (on May 1, 2020) –

The AICPA issued technical guidance for audit and financial reporting matters related to COVID-19.

The guidance highlights various topics of consideration related to COVID-19 (specifically in this case PPP loans) for audit engagements. With respect to management representation letters, the technical guidance cautions that additional representations could be added to the standard management representation letter, which may be warranted as a result of the existence of COVID-19 (specifically in this case PPP loans).

Furthermore, many auditors will include footnote disclosures within financial statements with respect to COVID-19. This includes subsequent events (e.g. drops in investments), potential going concern issues, and organizations not meeting existing loan covenants.

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