For-profit entities have many considerations regarding the Paycheck Protection Program (PPP) loan program, beyond who qualifies and how to apply for forgiveness. Once a loan is granted, there is the very real concern of how to account for it on your business entity’s financial statements.

The bad news is, there is no specific guidance under GAAP on accounting for this type of loan. The good news is that means there are options, depending on what makes the most sense for your organization. Below outlines four ways to consider accounting for your business’ PPP loan.

1. Recognize Your PPP Loan Using the Debt Model

If you're unsure if you are going to apply for forgiveness, you can use the debt model under U.S. generally accepted accounting principles (GAAP), recognizing the money as a loan. In this scenario, you would account for the loan as a financial liability in accordance with FASB ASC 470, Debt. Since there is no interest for a six month period and the interest rate is prescribed by a government agency, the SBA, there is also no imputed interest calculation.

You also will want to refer to the guidance in ASC 470-50-15-4, Liabilities: Extinguishments of Liabilities, which says when a business entity pays off part or all of the loan, or when the loan is forgiven and the debtor has been legally released, the liability is then reduced by the amount forgiven, and a gain on extinguishment is recorded.

2. Recognize Your PPP Loan Using the IAS 20 Model on Government Assistance

If your business expects to be eligible for loan forgiveness, concluding that the PPP loan represents, in essence, a grant, you may look to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, to account for the loan. As such:

• Your business would not recognize government assistance until there is reasonable assurance that any conditions attached to the assistance will be met and the assistance will be received.
• Reasonable assurance is not defined; however, based on interpretations it is analogous to “probable” in U.S. GAAP.
• Once there is reasonable assurance the conditions will be met, you would record the earnings impact of the government grants on a systematic basis over the periods in which your business recognizes as expenses the related costs for which the grants are intended to compensate.
• If your business determines that there is reasonable assurance that conditions for forgiveness will be met, you can record the record the forgiveness as other income or as an offset to related qualifying expenses.

3. Recognize Your PPP Loan Using the Government Grant Model

If your business expects to be eligible for loan forgiveness, concluding that the PPP loan represents, in essence, a grant, the AICPA will allow you to use the guidance in ASC 958-605, Not-for-Profit Entities: Revenue Recognition. As such:

• A business entity would essentially be able to record forgiveness when it incurs qualifying expenses and you would reflect in other income as “PPP loan forgiveness” or “PPP grant,” with appropriate disclosure.
• It would likely not be deemed appropriate for a business entity applying ASC 958-605 government grant model to offset expenses such as payroll with PPP loan forgiveness income.

Read “3 Considerations for Nonprofit Accounting of PPP Loan Funds”

4. Recognize Your PPP Loan Using the Gain Contingency Model

If your business expects to be eligible for loan forgiveness, concluding that the PPP loan represents, in essence, a grant, the AICPA will also allow you to use the guidance in ASC 450-30, Contingencies: Gain Contingencies. As such:

• The forgiveness of the PPP loan would not be recognized until all uncertainties regarding the final forgiveness of the loan are resolved. Once uncertainties are resolved, a gain contingency would be recorded.
• ASC 450 provides less specificity on measurement and recognition requirements related to PPP loans as compared to other models.

The PPP loan was intended to help businesses stay afloat during some very tumultuous times. For those who receive the assistance, it’s up to them to ensure they are accounting for it properly.

Contact Tina Dzik at tdzik@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.