Stone & Company Update - How to account for your PPP loan

Jun 10, 2020

How PPP funds should be reported in your financial statements

Now that many small businesses have secured a Paycheck Protection Program (PPP) loan, much of the discussion has shifted to understanding the forgiveness process. This means properly tracking expenses to demonstrate that the funds were spent on the types of expenses allowed under the program, and within the required limitations (no more than 40% on non-payroll expenses) over the covered period (now up to 24 weeks).

For entities that prepare financial statements, there is another question: How do we account for PPP funds received? Is it a loan? Is it a grant? If it’s a loan, how do we handle this below market interest rate? Is it income if it is forgiven or does it offset payroll expense?

We have received numerous inquiries from small business and non-profit clients, as well as other PPP stakeholders, over the past few weeks. Today we finally received some guidance from the American Institute of Certified Public Accountants (AICPA), which supports the guidance and feedback we have been generally providing to our clients.

We have summarized the answers to the most common accounting questions below:

Q. We are confident that the funds we received will be forgiven. How should we record the cash?

Record the initial cash received at funding as a financial liability and accrue interest on the debt in accordance with the interest method.

Q. Since the interest, at 1%, is well below market, should we impute additional interest as we typically would for US GAAP financial reporting?

You should not impute interest at a market rate.

Q. If we record the proceeds received as a liability and we know we meet the requirements for forgiveness, when can we remove the debt from the books?

Continue to record the proceeds from the loan as a liability until one of two conditions are met: Either (a) the loan is partly or wholly forgiven, and the borrower is legally released from the obligation, or (b) the borrower pays of the loan.

Q. How do we record forgiveness?

Reduce the liability by the amount forgiven and record a gain on extinguishment once the loan is partly or wholly forgiven and legal release is received.

Based on the guidance from the AICPA, there may also be instances where a for-profit business entity expects to meet the PPP’s eligibility criteria for forgiveness and concludes that the PPP loan is, in substance, a grant that is expected to be forgiven. An entity in such a situation would not be able to recognize the government assistance until there reasonable assurance that the applicable conditions will be met. The earnings impact would then be recorded on a systematic basis over the periods in which the entity recognizes as expenses the related costs that the grants are intended to cover.

The AICPA’s guidance also discusses situations where a non-profit that expects to meet the criteria for forgiveness might account for the funds as a conditional contribution.

We will continue to monitor developments related to the PPP as part of our commitment to supporting our clients and the business community.

Stone & Company LLC is a CPA firm in Lexington, Massachusetts – Inspired by our values and focused on service. Contact us at info@stonecpas.com

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