Businesses, including nonprofits, that qualified for a forgivable loan from the Small Business Administration through the Paycheck Protection Program (PPP) have been given accounting guidance by the American Institute of Certified Public Accountants (AICPA). The guidance addresses how a borrower under the program should account for the loan.
The guidance states that the legal form of the PPP loan is debt and may be accounted for in accordance with existing financial liability guidance. A business should:
- record the loan as a financial liability and accrue interest;
- not assign additional interest at the market rate;
- continue recording proceeds from the loan as a liability until the loan is either partly/fully forgiven or has been paid off;
- reduce the PPP liability by the amount of the loan that was forgiven and record a gain on the extinguishment when legally released from repayment of the PPP loan.
If a commercial business entity expects to meet the PPP’s criteria for forgiveness of the loan amount and concludes the PPP funds represent, in substance, a government grant, the commercial business entity may:
- record the cash info from the PPP loan as a deferred income liability;
- once it knows that all conditions will be met, recognize into earnings over time in a systematic fashion across the same time period as the expenses for which the PPP funds are intended to compensate;
- when recognized into earnings, present the amount separately or within a general heading such as “other income”, or as a reduction of the related expenses.
If a nonprofit expects to meet the PPP’s eligibility criteria and views it as a grant that will be forgiven, to account for the loan, the nonprofit may account for the PPP loan as a conditional contribution rather than a financial liability by:
- initially recording the cash inflow from the PPP loan as a refundable advance, then
- reducing the refundable advance and recognizing the contribution once conditions of release have been substantially met or explicitly waived.
If you have questions on the accounting guidance issued by the AICPA, please contact your Smith & Howard advisor by completing the contact form below.