One of the most highly publicized relief options in the Coronavirus Aid, Relief, and Economic Security (CARES) Act that small businesses and sole proprietors have benefited from is the Paycheck Protection Program (PPP). The PPP initially authorized $349 billion to be disbursed via federally guaranteed loans administered by the Small Business Administration (SBA), with an additional $310 billion in appropriated funds coming in an approved second funding by the federal government.
The loans were provided to eligible borrowers primarily to help retain workers, maintain payroll, and to help cover certain overhead costs. The loans are administered under the SBA’s 7(a) program and can be partially or even fully forgivable. Legally, the PPP loans are originated in the form of a debt instrument. However, it can also be viewed as a government grant of sorts. Since the terms of the PPP loans are fairly unique, we now turn to the accounting treatment for the loan proceeds, and subsequent forgiveness.
The American Institute of CPAs (AICPA) recently issued their guidance on the accounting treatment for these PPP obligations both at issuance, and also subsequently for when some level of forgiveness is achieved. There are two treatment options from which nongovernmental for-profit entities can choose.
The first option would be to record the PPP loan as debt upon loan origination. During the loan period, interest would be accrued at the rate provided for in the loan terms. Subsequently, when either partial or full debt forgiveness is achieved and the entity is legally released from that portion of the liability, derecognition of the liability would be recorded by removing the liability and recognizing a gain on the liability extinguishment through other income.
A second option provided by the AICPA compares the PPP loan with a governmental grant, and therefore contemplates the use of grant accounting. Several criteria must be met to be eligible for grant accounting, and if met, would result in a deferred income liability upon loan origination. Subsequently, during the loan period, no interest would accrue on the outstanding PPP obligation. Furthermore, once there is reasonable assurance that some level of forgiveness will be achieved, the entity would then systematically as related PPP eligible forgivable costs are incurred, reduce the liability with an offset through earnings either as other income, or by a reduction of related expenses (compensation expense and certain overhead costs).
Your Somerset advisor can help you with the proper accounting treatment of the PPP loan forgiveness related to your business. Please contact your Somerset advisor at 317-472-2200 with any questions.