As legislation is passed at an increased speed to combat challenges presented by the COVID-19 crisis, accounting methods for the Paycheck Protection Program (PPP) loan and loan forgiveness may offer complexities and confusion to businesses and not-for-profit organizations attempting to address these changes. Companies can greatly benefit from the financial offerings that Congress is continuously working on, and as your accounting professionals, we are here to help you understand these programs.
While we await clarifications from the U.S. Small Business Administration (SBA) regarding various aspects of the loan forgiveness provisions in the PPP loan, our experts provide an overview of the anticipated guidance. Several top-of-mind topics include:
- Are payroll costs, rent, utilities and mortgage interest expenses incurred during the 8-week covered period, determined based on cash, accrual or hybrid basis?
- Can the covered period extend beyond June 30, 2020?
- Example: Industries, like the hospitality sector, may not re-open until June or July depending on when stay-at-home orders are lifted.
- When the loan amount for all or a portion of expenses incurred are forgiven, are those deductible expenses for tax reporting purposes?
- Are the payroll costs during the covered period compared with the 8-week average of the payroll costs incurred during the immediately preceding full calendar quarter?
Here’s how it affects business entities and not-for-profit organizations.
Business Entities
U.S. GAAP has limited guidance on the accounting for government assistance (grants) to business entities, hence, companies may look to International Accounting Standards (IAS) 20 to determine the appropriate accounting. As well, it may be appropriate to consider the PPP loan forgiveness as a non-exchange transaction, and therefore, Accounting Standards Codification (ASC) 606 may not apply.
Consistent with the provisions of IAS 20, after initial recognition of the loan proceeds, government grants are recognized in the statement of income on a systematic basis that corresponds with the manner in which the business entity recognizes the underlying expenses for which the government grant is intended to compensate.
IAS 20 generally allows government grants to be recognized in the statement of income either on a “gross” or “net” basis. A gross basis recognizes the forgiven portion of the loan amount as “other income” in the statement of income. A net basis recognizes the forgiven portion of the loan amount as an offset against the related eligible expenses.
See below for an illustration of the journal entries.
On receipt of the loan proceeds:
Debit – Cash
Credit – PPP Loan Payable (long-term liability)
When expenses are incurred/paid during the 8-week “covered” period:
Debit – Related expense accounts
- The business entity could consider maintaining separate general ledger accounts to keep track of the eligible expenses paid during the 8-week covered period. The company’s lender, who is authorized to approve the loan forgiveness amount, would require the companies to provide them with the details of the loan forgiveness amount, along with the relevant supporting documents for the eligible expenses (evidence), when submitting an application and certification for the loan forgiveness.
Credit – Cash
- As noted above, clarifications from the SBA is required regarding whether the expenses incurred during the covered period are accounted on a cash, accrual or hybrid basis.
The PPP loan forgiveness amount would be recognized when:
- The business entity has complied with all of the PPP regulations; and
- The lender has approved the loan forgiveness amount.
Upon approval of the loan forgiveness amount:
As noted above, the journal entries can be recorded either on a gross or net basis presentation, as follows:
For Gross Presentation:
Debit – PPP Loan Payable (Long-term liability); loan amount forgiven
Credit – Other Income; loan amount forgiven
(or)
For Net Presentation:
Debit – PPP Loan Payable (Long-term liability); loan amount forgiven
Credit – Payroll, Rent, Utilities, Mortgage Interest (as applicable); loan amounts forgiven
Not-for-Profit Entities
For not-for-profit entities that are eligible to participate in the PPP, the accounting for the loan proceeds and the loan forgiveness will be in accordance with Accounting Standards Update (ASU) 2018-08.
ASU 2018-08 includes specific criteria to consider when determining whether a contract or agreement should be accounted for as a contribution or as an exchange transaction. It also provides a framework for determining whether a contribution is conditional or unconditional, which impacts the timing of revenue recognition. In accordance with ASU 2018-08, the PPP loan will be accounted for as a nonexchange transaction, because the government is not receiving commensurate value in return for making the loan. At the inception of the loan, the proceeds would be recorded as a liability, as there are conditions for forgiveness of the loan (both a measurable performance barrier and a right of return). The liability would not be recognized as revenue until the conditions are met and the loan is forgiven.
Not-for-profit entities may routinely receive forgivable loans, and in those circumstances, such entities may not consider the forgiveness of the PPP loan as unusual or infrequent. It may also depend on whether significant COVID-19 related expenses are incurred and are reported as unusual or infrequent. Some judgment is involved in this determination.
FASB ASC 220-20-45-1 requires events or transactions that are either unusual, infrequent or both to be presented as separate elements in the statement of activities. It may be reasonable to infer COVID-19 related loan forgiveness could be considered unusual and infrequent, and thus be reported separately in the statement of activities.
Accordingly, the loan forgiveness amount would either be presented as a separate amount before the “total revenues, gains and other support” caption in the statement of activities, as a nonoperating item in a statement of activities that distinguishes between operating and nonoperating items or alternatively, disclosed in the notes to the financial statements.
An illustration of the accounting journal entries are as follows:
On receipt of the loan proceeds:
Debit – Cash
Credit – PPP Loan Payable (long-term liability)
When expenses are incurred/paid during the 8-week “covered” period:
Debit – Related expense accounts
Credit – Cash
The PPP loan forgiveness amount would be recognized when:
- The not-for-profit has complied with all of the PPP regulations; and
- The lender has approved the loan forgiveness amount.
Upon approval of the loan forgiveness amount:
Debit – PPP Loan Payable (Long-term liability)
Credit – Grant Revenue
Disclosures
For business entities, disclosures in the notes to financial statements are required regarding the nature, terms and conditions of the assistance (grants), amounts, a description of the accounting policy selected (i.e. gross or net presentation) and how the amount is reflected in the statement of income/statement of activities.
For not-for-profit entities, terms of the outstanding PPP loan should be disclosed, including provisions for forgiveness of the loan. The loan agreement contains a conditional promise to give that should be disclosed in accordance with ASU 2018-08.
Our accounting and not-for-profit experts are constantly monitoring changes in legislation to find solutions for your business. Please contact us for insight and assistance navigating this business climate.
About our authors
Sylesh Babu
Sylesh Babu, CPA, CFE, ACA, DipIFR, is a partner in the company’s audit and assurance practice. Sylesh has nearly 30 years of experience providing accounting and audit solutions, with extensive knowledge in addressing challenges facing clients in manufacturing & distribution, business and professional services industries such as engineering, law, staffing and IT consulting services. In his role, he offers financial statement audit, review and compilation services as well as agreed upon procedures, due diligence, forensic and consulting services to businesses.
Robb Zerfass
Robb Zerfass, CPA, is a tax partner in Sikich’s Chicago office. Robb has over 30 years of experience working with clients in a number of industries, from professional services, including law firms and healthcare organizations, to manufacturing and distribution, real estate, and food and hospitality.
Jennifer Casacchia
Jennifer Casacchia, CPA, is a director on the firm’s not-for-profit (NFP) and higher education practices team. She has more than 15 years of experience working extensively with NFP and higher education organizations and has more than 12 years of experience in public accounting with direct experience in the audits of NFP organizations, including those that receive federal funds.
