Article updated on October 2, 2020
Amongst all of the uncertainty surrounding the COVID-19 pandemic, the U.S. Small Business Administration (SBA) issued the Paycheck Protection Program (PPP) loan to provide incentives for small businesses to keep workers on their payroll. Many small businesses in the Title IV sector received these loans and are now trying to determine how to correctly account for them under USGAAP while also understanding how these choices will affect composite scores.
While USGAAP provides limited guidance on government assistance, the American Institute of Certified Public Accountants (AICPA) issued guidance through the Technical Questions and Answers (TQA) 3200.18 regarding accounting for a forgivable loan under the PPP loan. It provides four different accounting methods that the borrower can adopt while conforming to USGAAP, including the “debt” model, the “government grant” model, the “contributions” model, and the “gain contingency” model. Details of the methods are noted below:
“Debt” model (ASC 470)
A PPP loan is recognized as a note payable (long-term) upon receipt of proceeds. The PPP loan remains as a loan until it is forgiven by the lender (fully or partially), and the borrower is legally released of the debt; or the loan is paid off to the lender. At this point, forgiveness income is recognized in the income statement with an offset to note payable. Forgiveness under this model is the most objective and recognized the latest. The forgiveness is likely much later than expenses incurred, which will often result in the revenues/expenses landing in different fiscal years.
“Government Grant” model (using International Accounting Standards (IAS) 20 as analogy)
Under this model, the borrower recognizes the PPP loan as deferred income (long-term) upon receipt of proceeds. Loan forgiveness is not recognized until it is probable that any and all conditions of the PPP loan forgiveness will be met and the lender approves the loan forgiveness. Once these criteria are reached, forgiveness income is recognized in the income statement with an offset to deferred income. Forgiveness under this model is the most subjective and recognized the quickest amongst the models. Due to faster recognition, this method has the least likelihood of mismatch of revenues/expenses.
“Contributions” model (FASB ASC 958-605 as an analogy)
Proceeds of the PPP loan are recognized as a refundable advance (long-term). The loan is forgiven when all loan forgiveness conditions are substantially met or explicitly waived by the lender. Once the criteria are met, forgiveness income is recognized with an offset to the refundable advance. Forgiveness under this model is the second most subjective and recognized the second fastest amongst the models.
Gain Contingency model (FASB ASC 450-30)
This model recognizes the PPP loan as note payable (long-term) upon receipt of proceeds. Forgiveness income is recognized when all contingencies related to PPP loan forgiveness are met. An offset is made to note payable when this occurs. Forgiveness under this model is the second most objective and recognized the second latest.
Impact on Composite Scores
Previously, all debt was used as an add-back in the Primary Reserve Factor of the composite score. The primary reserve factor of the composite score is based on the ratio of adjusted equity divided by the total expenses for the year. Under the old calculation, one of the stipulations to arrive at adjusted equity involved subtracting net property and adding back long-term debt to offset the amount of property that was subtracted.
This add-back is no longer included in the composite score calculation and, thus, none of the debt from the PPP loan will be beneficial for composite score purposes (if debt or gain contingency models are used).
As such, the difference between the models in relation to composite score will come in terms of timing of forgiveness recognition. For all areas of the composite score, earlier forgiveness recognition is beneficial, as more income and higher equity will be shown, as well as being able to net the revenues and expenses if they occur in the same fiscal year.
For businesses that have not yet received a legal release of debt by your fiscal year-end, the government grant model should be reviewed to determine if your institution meets all the criteria to recognize revenue—as this method generally results in earlier revenue recognition.
The Department of Education (DOE) is aware that institutions receiving PPP loans have an opportunity for the full amount of their loan principal to be forgiven. Therefore, as long as the amount or an estimate of the amount of forgiveness the institution expects to earn is identified on an institution’s auditing financial statements, the DOE will exclude that portion of the PPP loan from total liabilities. The DOE will also, as a result, increase the institution’s equity or net assets by that amount in calculating the institution’s composite score. Please note, loan forgiveness amounts must be identified on the statement for the year in which the loan was received and must be attested to by the institution’s auditor.
Talk to Our Experts
Make sure your school understands and is complying with recognition of the PPP loan and recognizes the implications it has on the composite score. Contact us to talk through your specific situation with a Title IV audit expert.