PPP Guidance to Consider for 2020 Financial Reporting

Did your organization receive a Paycheck Protection Program (PPP) loan in 2020? Entities that received a PPP loan in 2020 have options for how to account for the loan at yearend. The team at Anderson ZurMuehlen is here to help you understand those options and prepare your organization to properly account for the loan at yearend.

The PPP was designed as part of the CARES Act and implemented by the Small Business Administration (SBA) to provide loans as a direct incentive for small businesses to keep workers employed and compensated. Funds provided through the PPP are eligible for full or partial forgiveness if the loan proceeds are spent on qualifying expenditures and the organization meets other criteria, including maintaining employee headcount and certain limitations on compensation reductions.

Because PPP loans have the potential for forgiveness, and many organizations have already started the process of applying for forgiveness, borrowers understandably may be confused about how to account for these funds at yearend. Loans are typically accounted for as debt; however, in some situations, it may be appropriate to treat PPP loans differently if you believe your organization has met the criteria for forgiveness and believe the loan will ultimately be forgiven.

Here is some quick guidance for you to consider as you close out your 2020 financial records.

Option 1: Debt Approach (ASC 470)

The AICPA has indicated this treatment is a safe harbor, acceptable for all nongovernmental entities in any instance. Here is a link to the full Q&A released by the AICPA –

Available to: All nongovernmental entities

Loan Proceeds: Shown as debt on the balance sheet, classified as current or long-term based on repayment terms of the loan. Interest is accrued on the balance sheet and expensed on the income statement at the 1% contractual rate.

Loan Forgiveness: The debt is carried on the balance sheet until the entity has been “legally released as primary obligor,” or in other words, once the SBA has approved the forgiveness application. Once forgiven the loan proceeds will be recognized through the income statement as a non-operating gain.

Financial Statement Reporting: Loan proceeds and payments are a financing activity and interest payments an operating activity on the statement of cash flows. If forgiveness is officially received before the issuance of financial statements, this would be disclosed as a Type 2 subsequent event with no impact on the yearend financial statement amounts.

Considerations: This method is the most straightforward and requires the least amount of judgment; however, the length of time between recording the debt and official forgiveness will be the longest under this method. The lag in receiving official forgiveness may lead to expenses and revenues being recorded in different periods and impact key financial statement ratios.

Option 2: Conditional Contribution Approach (ASC 958-605)

This option is available to not-for-profit organizations and provides an alternative to the debt model for organizations who meet the PPP’s eligibility criteria and expect forgiveness. Under this model, the organization treats the PPP loan proceeds as an advance of a conditional grant, and revenue is recognized as the conditions of the grant are “substantially met.”

Available to: Primarily not-for-profit organizations; however, for-profit entities may analogize

Loan Proceeds: Shown as a refundable advance (deferred revenue) on the statement of net position or balance sheet. No accrual for interest or interest expense is appropriate under this method as it is considered a grant, not debt.

Loan Forgiveness: The deferred revenue is carried on the statement of net position or balance sheet until the conditions of forgiveness are “substantially met.” The conditions of the PPP loan include maintaining headcount, limitations on compensation reductions, and spending the funds on qualified expenses that achieve the required measurable metrics (i.e. percentage spent on payroll, etc.). This method indicates that contribution revenue can be recognized as the conditions of the PPP loan are “substantially met.”

Financial Statement Reporting: The PPP activity would flow through the operating section of the statement of cash flows. Disclosures should clearly explain the accounting policy used to account for PPP funds and the interpretation of what conditions are included and when they are deemed substantially met.

Considerations: This method requires more judgment than the debt model; however, may allow for some, if not all, of the revenue to be recognized in the same period as the expenses.

Option 3: Account for PPP Proceeds as a Gain Contingency (ASU 450-30)

For-profit organizations who expect forgiveness may view the loan as a gain contingency. Under this model, revenue is not recognized in the income statement until realized, or when forgiveness has been received. This method is similar to the debt model; however, should only be used when the entity expects forgiveness, and allows the entity to avoid reporting the PPP loan as debt in the financial statements.

Available to: For-profit organizations only

Loan Proceeds: Shown as a liability on the balance sheet. No accrual for interest or interest expense is appropriate, as it is not considered debt.

Loan Forgiveness: The liability is carried on the balance sheet until the amount is “realized or realizable”, in this case, once forgiveness is received. Revenue would be recognized in the non-operating section of the income statement.

Financial Statement Reporting: The PPP activity would flow through the operating section of the statement of cash flows. Disclosures should clearly explain the accounting policy used to account for PPP funds (in this case, FASB ASC 958-605) and the interpretation of what conditions are included and when they are deemed substantially met.

Considerations: As in the debt model, there is less judgment involved in recognizing the forgiveness, but a longer time period between incurring the expenses and recognizing the gain contingency may lead to expenses and revenues being recorded in different periods.

The rules and guidance surrounding the Paycheck Protection Program are constantly evolving and we are here to help you navigate all of these changes to ensure your financial records best reflect the PPP proceeds. Remember the debt approach is allowed in all circumstances and requires the least amount of judgment. To gain more understanding specific to your organization, please call an Anderson ZurMuehlen professional today.

Written by Evan Kulesa, CPA a Senior in the Attest department at Anderson ZurMuehlen in Helena, Montana.

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