By Courtney Gallagher, CPA, Audit Manager
After applying for and receiving a Paycheck Protection Program loan (PPP Loan), many businesses are trying to determine how to account for the loan on their financial statements. This week, the American Institute of Certified Public Accountant’s issued Technical Question and Answer (TQA) 3200.18, which addresses accounting for these loans for nongovernmental entities. Nongovernmental entities include business entities (for-profit company that is not publicly traded) and not-for-profit entities.
When the PPP Loan is received, the entity would record the loan as debt (a liability) and would also accrue interest based on the terms of the PPP loan agreement. The loan will remain recorded as a liability (debt) until either the loan is partially or wholly forgiven, and the entity has been released legally, or, the entity pays off the loan in full.
If the loan is partially or wholly forgiven and the entity is legally released from being the primary obligor, a business entity has three options for recognizing the loan forgiveness:
- A Grant – If the entity determines the loan represents a grant, then accounting for government assistance of forgivable loans can be followed. Government assistance is not recognized until all conditions attached to the loan are met and the forgiveness is received. Once this occurs, earnings would be recorded on a systematic basis over the periods in which the entity recognizes the related costs for which the loan was intended to be used. Examples of these related costs are payroll, mortgage interest, rent and utility expenses. The forgiven amount of the loan would be reduced from debt and recorded as deferred revenue, a liability. The entity would reduce the deferred revenue by recording earnings either as debt forgiveness in revenue or a reduction of the related expenses (for example, credit wage expense for amounts spent on wages). The journal entry would be a debit to deferred revenue and a credit to revenue or a credit to the expense account for which the funds were used.
- A Contribution – The entity may determine to account for the forgiveness in accordance with accounting for contributions by not-for-profit entities. Under this guidance, the timing for recognition of the contribution would depend on whether or not the contribution was conditional. As the PPP loan forgiveness is dependent on meeting certain criteria, the loan forgiveness would be considered a conditional contribution. Therefore, the contribution (revenue) would not be recognized until the conditions are substantially met or explicitly waived. The entity would record deferred revenue for the forgiven amount of the loan. The journal entry would be recorded as a debit to debt and a credit to deferred revenue. Once the conditions of release are met, deferred revenue would be reduced, and contribution revenue would be recorded. The journal entry would be to debit deferred revenue and credit contribution revenue.
- A Gain Contingency – The entity can follow guidance for gain contingency recognition. The amount forgiven would remain recorded as debt until the proceeds are realized or realizable (contingencies related to the PPP loan have been met), at which time the entity would reduce the debt by the amount forgiven and record a gain on extinguishment (revenue). The journal entry would be to debit debt and credit revenue (gain on extinguishment).
If the loan is partially or wholly forgiven and the legal release is received, a not-for-profit entity must account for the forgiveness in accordance with accounting for contributions by not-for-profit entities. Please see option 2 above for the guidance on recognizing loan forgiveness as a contribution.
Guidance states that a not-for-profit entity may choose not to record the loan as debt when received. Instead, it can be recorded as deferred revenue if it expects to meet the PPP’s eligibility criteria and determines that the loan represents a grant that it is expected to be forgiven.
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