AICPA Provides Guidance on Forgivable PPP Loans

Chris Gaetano
Published Date:
Jun 11, 2020
The AICPA released technical guidance instructing practitioners how best to account for forgivable PPP loans. The guidance, which the Journal of Accountancy said was prepared in cooperation with staff from the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC), was meant to answer one question: How should a nongovernmental entity account for a forgivable loan received under the Small Business Administration Paycheck Protection Program?

The guidance noted that, since the program was launched, practitioners have been unsure how to account for the loans because, while legally they count as debt, in substance they can act more like a government grant.

The AICPA said, however, that regardless of whether the entity expects to repay the PPP loan, it can be accounted for as a financial liability in accordance with FASB ASC 470, and the accrued interest in accordance with the method prescribed under FASB ASC 835-30. The guidance said an entity would not impute additional interest at a market rate (even though the stated interest rate may be below market) because transactions where interest rates are prescribed by governmental agencies (for example, government guaranteed obligations) are excluded from the scope of the FASB ASC 835-30 guidance on imputing interest.

Based on the guidance in FASB ASC 405-20-40-1, the proceeds from the loan would remain recorded as a liability until either (1) the loan is, in part or wholly, forgiven and the debtor has been “legally released” or (2) the debtor pays off the loan to the creditor. Once the loan is, in part or wholly, forgiven and legal release is received, a nongovernmental entity would reduce the liability by the amount forgiven and record a gain on extinguishment.

In the case of a business entity that concludes that the loan acts more like a grant, then the guidance actually advises it to analogize to IAS 20, an international standard that outlines a model for the accounting for different forms of government assistance, including forgivable loans. Alternatively, it can also analogize to FASB ASC 958-605 or FASB ASC 450-30.

In the case of a not-for-profit that believes its PPP loan is acting more like a grant, the guidance said it should account for such PPP loans in accordance with FASB ASC 958-605 as a conditional contribution.

In general, said the guidance, nongovernmental entities with material PPP loans should adequately disclose their accounting policy for such loans and the related impact to the financial statements.

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