United States

TQA: Borrower accounting for PPP loans

FINANCIAL REPORTING INSIGHTS  | 

The American Institute of Certified Public Accountants has issued Technical Question and Answer (TQA) 3200.18 to provide nonauthoritative guidance about how a nongovernmental entity should account for a forgivable loan received under the Small Business Administration Paycheck Protection Program (PPP). The TQA concludes that, regardless of whether a nongovernmental entity expects to repay the PPP loan or believes it represents, in substance, a grant that is expected to be forgiven, it may account for the loan as a financial liability in accordance with Topic 470 of the Financial Accounting Standards Board’s Accounting Standards Codification (ASC), “Debt,” and accrue interest in accordance with the interest method under ASC 835-30, “Interest – Imputation of Interest.” The proceeds from the loan should remain recorded as a liability until either (a) the loan is, in part or wholly, forgiven and the debtor has been “legally released” or (b) the debtor pays off the loan to the creditor. Once the loan is, in part or wholly, forgiven and legal release is received, the entity would reduce the liability by the amount forgiven and record a gain on extinguishment.

If a nongovernmental entity that is not a not-for-profit entity (NFP) (that is, it is a business entity) expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may analogize to: 

  • International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance. As such, a business entity would record the cash inflow from the PPP loan as a deferred income liability. Subsequent to initial recognition, a business entity would reduce the liability, with the offset through earnings (presented as either [a] a credit in the income statement, either separately or under a general heading such as “other income,” or [b] a reduction of the related expenses), as it recognizes the related cost to which the loan relates.
  • ASC 958-605, “Not-for-Profit Entities – Revenue Recognition”  
  • ASC 450-30, “Contingencies – Gain Contingencies”

If an NFP chooses not to follow ASC 470 and it expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it should account for such a PPP loan in accordance with ASC 958-605 as a conditional contribution.

The SEC’s Office of the Chief Accountant has indicated it would not object to an SEC registrant accounting for a PPP loan under ASC 470 or by analogy to IAS 20.

We have updated our white paper, Coronavirus: Financial reporting considerations, to address this TQA and other recent coronavirus-related financial reporting developments.

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