By Damien Strohmier, CPA, Senior Manager
As many companies are receiving Paycheck Protection Program (PPP) debt forgiveness and loan payoffs, the question of how to record forgiveness has resurfaced.
This article will revisit accounting for PPP loans as debt or government grants and provide guidance on recording forgiveness.
Accounting for PPP Loans as Debt
Record initial cash inflow of PPP funds as a financial liability. Retain as a liability until either the loan is partly or fully forgiven, and the debtor has been legally released OR when loan is paid off. Companies should give consideration to accruing interest over this period as well. Upon legal release, you would reduce the liability and record a gain on extinguishment of debt for the portion that is forgiven. Extinguishment of debt can be presented in the other income (expense) section of your income statement.
What constitutes legal release under the debt model? Legal release is considered to have occurred upon payment of the loan or notification by the Small Business Administration that acknowledges forgiveness of the outstanding loan.
When preparing the statement of cash flows for your company, the cash inflow from the PPP funds along with any subsequent payments will be shown as a financing activity. Any gain on extinguishment of debt will be included as a reconciling item and reduce net income in arriving at the company’s cash flows from operating activities.
Accounting for PPP Loans as Government Grants
Government Grant Model (IAS 20)
A borrower may elect to account for PPP funds as a government grant if it is reasonably assured that the company will meet both the eligibility and forgiveness criteria for all or substantially all of the PPP loan. If a company determines it is reasonably assured that they meet these criteria, they should have recorded the grant as deferred income and relieved deferred income as eligible expenses were incurred. The income recognized from the grant could offset expenses incurred or be grouped with other income.
The government grant model will likely require the addition of an accounting policy to the notes to the financial statements. Statement of cash flow presentation would not be altered as the income portion of the grant would be included in net income. However, a company could also elect to present similar to the debt model.
More resources regarding the PPP process and any changes within the new relief package including deductibility, the forgiveness application and process, and second draw loans can be found here. You can also read a comprehensive summary of the PPP provisions here.
Please reach out to your local Blue & Co., LLC advisor if you have any questions related to specific circumstances of your business as you close your books for 2020.