The AICPA issued Q&A Section 3200, which provides guidance on accounting for forgivable loans received under the Small Business Administration Paycheck Protection Program (PPP). In light of the unique nature of the PPP, questions have arisen as to the most appropriate treatment of the liability and the subsequent forgiveness. The guidance indicates that it would be appropriate to account for the loan as either debt or as a government grant, if certain conditions are met.
Regardless of whether an entity ultimately expects to repay the loan or receive forgiveness, it may choose to account for the loan as debt, accruing interest at the stated rate. If the loan were to be forgiven, the entity would record a gain on extinguishment equal to the amount forgiven once the entity has been legally released from its obligation to repay.
A not-for-profit entity that expects to meet the eligibility requirements may choose to account for the loan as a government grant, initially recording a deferred income liability and subsequently recognizing revenue in accordance with the guidance in ASC 958-605 regarding conditional contributions.
A business entity that expects to meet the eligibility requirements and treats the loan as a grant that is expected to be forgiven can choose between two alternatives. Under the first option, the entity would record the cash received as a refundable advance. PPP loan forgiveness would be recognized in earnings and the advance would be reduced once the conditions of release have been substantially met or explicitly waived. Alternatively, as entity can choose to record the initial liability upon receipt of the cash and treat the forgiveness as a gain contingency, taking it into earnings at the time that the proceeds are realized.
Entities should be sure to update their accounting policies for the PPP loans and forgiveness.
The full text of the AICPA Q&A is available here.
Readers should not act upon information presented without individual professional consultation.