If you are a nongovernmental entity, which includes business entities and not-for-profit entities, and you have received a loan through the Paycheck Protection Program (PPP), you may be wondering how to appropriately account for the loan and the expected partial or full forgiveness of the loan in accordance with FASB.
The AICPA has recently issued a Technical Q&A which addresses accounting for the loan as well as expected partial or full forgiveness of the loan.
Accounting for the Loan
The loan is to be accounted for as debt and any interest would be accrued. The AICPA has indicated that no additional interest would be required to be imputed beyond the interest rate on the PPP loan.
Accounting for Loan Forgiveness
In following the accounting standards for debt, the liability cannot be removed until either 1) the loan has been paid off or 2) the loan has been partially or fully forgiven and there is a legal release of the forgiveness. Once a legal release of forgiveness is received, a nongovernmental entity can record the amount forgiven as a gain on extinguishment.
A nongovernmental entity, that is not a not-for-profit entity, may choose to utilize additional guidance if the business entity feels that the loan forgiveness represents a government grant. Some guidance states that, before any income is recognized, there must be reasonable assurance that 1) the conditions attached to the grant will be met and 2) the grant will be received. Once this reasonable assurance is obtained, the business entity can recognize income to match the expenses incurred. Other guidance states that a gain can be recognized once 1) contingencies related to the grant have been met and 2) the grant is realized or realizable.
A not-for-profit entity or other nongovernmental entity may choose to follow guidance specific to not-for-profit entities. This guidance states that the grant would not be recognized until 1) the conditions on which the grant depends have been substantially met or 2) explicitly waived. Once either-or occurs, the not-for-profit entity (or business entity) can remove the related liability and recognize income.
Disclosure of the Loan and Related Forgiveness
Whether you are a not-for-profit or other nongovernmental entity, you are to disclose the accounting policy and financial implications related to any material PPP loan.
Accounting for the PPP loan and related forgiveness depends on the facts and circumstances of each case. If you have any questions on accounting (or the related disclosure) for funding you have received through the Paycheck Protection Program, please feel free to reach out to YHB.
About the Author
Since joining YHB in 2012, Katrina’s career focus has been on nonprofit organizations such as private schools, colleges, foundations, religious organizations, museums, and other nonprofit entities. Her service to those organizations include audit and attest as well as tax services.