Determining the proper accounting treatment for PPP loans can be confusing, especially when the loan recipient expects the loan to be forgiven and wants to account for the arrangement as an in-substance grant. To help you better understand some of the accounting issues, we answer five common questions about PPP loan accounting.
A PPP loan is, in form, a forgivable loan. If you meet the conditions for forgiveness, the lender and Small Business Administration (SBA) forgive the loan balance and accrued interest; you have no obligation to pay it back. However, if the conditions for forgiveness are not met, you must pay back all or a portion of the loan balance, including accrued interest, over the loan term.
Because a PPP loan is a legal form of debt, it’s always acceptable to account for a PPP loan as a loan under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topics 470 and 405.1
However, if after considering all relevant facts and circumstances you determine that forgiveness is probable, it is also acceptable to account for a PPP loan as an in-substance grant. For this to happen, you must both be eligible for the PPP loan and expect to meet the terms for forgiveness (for example, the funds will be spent on qualifying expenses, and you maintain required salary and employment levels).
Given the lack of explicit guidance on how to account for in-substance government grants under U.S. GAAP, a for-profit entity will need to elect an accounting policy for its loan, which might include ASC Topic 958-605 or IAS 20.2 A not-for-profit entity that elects to account for a PPP loan as an in-substance grant would apply ASC Topic 958-605 to its loan.
Per the terms of the PPP loan program, the SBA can review your eligibility for a PPP loan, including your need for the loan, both before and after forgiveness is granted. This fact, in conjunction with uncertainty about how the SBA will interpret the “necessity” requirement of the loan program, could raise doubts about whether you can comfortably conclude you were eligible for the loan and if it is probable your PPP loan will be forgiven (for example, because you did not, in retrospect, need the PPP loan).
The terms of the PPP loan program, including the eligibility requirements, are a matter of legal interpretation; you should consult with legal counsel when assessing your eligibility for the PPP loan program. We also encourage you to document your assessment of eligibility, including the facts and circumstances considered by management and the views of legal counsel.
If, after consideration of your specific facts and circumstances, you are unable to conclude that it is probable your loan will be forgiven, you should account for the loan under ASC Topics 470 and 405.
As of the date of this publication, the FASB does not have an active standard-setting project on its agenda related to the accounting for PPP loans and other forms of government assistance. While the FASB staff continues to evaluate interpretive questions outside the PPP loan program,4 we do not expect the FASB to issue guidance on the accounting for government assistance in the near term.
In the meantime, you might consider the nonauthoritative guidance in Technical Questions and Answers 3200.18, "Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program," issued by the AICPA in June 2020.
Crowe accounting professionals have a deep understanding of multiple government assistance programs, including PPP loans. We can help you think through your options, develop and implement policies and procedures that can stand up to an audit, and prepare required disclosures for your financial statements.
1 See ASC Topic 470, “Debt,” and ASC Topic 405-20, “Liabilities – Extinguishments of Liabilities.”
2 See ASC Topic 958-605, “Not-for-Profit Entities – Revenue Recognition" and International Accounting Standard 20, "Accounting for Government Grants and Disclosure of Government Assistance.”
3 See ASC Topic 250, “Accounting Changes and Error Corrections.”
4 See the meeting minutes for the FASB’s May 20, 2020, board meeting.
