Accounting for Paycheck Protection Program loan forgiveness under US GAAP

Rödl & Partner Accounting Matters Vol 2020– 1, published in August 2020

​As recipients of loans under the Paycheck Protection Program (PPP) begin to submit applications for loan forgiveness, the question now arises as to how and when such forgiveness of debt will be accounted for in the financial statements. The American Institute of Certified Public Accountants (AICPA) clarified the options for how to account for PPP loans.

The AICPA recently published “Q&A Section 3200 – Long-Term Debt – .18 – Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program” (“Q&A”). https://www.aicpa.org/content/dam/aicpa/interestareas/frc/downloadabledocuments/tqa-sections/tqa-section-3200-18.pdf

The Q&A suggests that business entities reporting under US GAAP (other than Not-for -Profit or government entities) should account for forgiveness of the loan under the guidance of:

 FASB ASC 470, debt or
FASB ASC 450-30, Contingencies: Gain Contingencies

Regardless of whether the business entity expects to repay the PPP loan or believes it represents, in substance, a grant that is expected to be forgiven, it may account for the loan as a financial liability and accrue interest in accordance with FASB ASC -470.

The proceeds from the loan would remain recorded as a liability until either, (1) the loan is, in part or wholly, forgiven and the debtor has been “legally released;” or (2) the debtor pays off the loan to the creditor. Once the loan is, in part or wholly forgiven, and legal release is received, a business entity would reduce the liability by the amount forgiven and record a gain on extinguishment. Legal release will likely not take place by the lender until the SBA has approved the forgiveness application which could result in the gain on extinguishment being recognized in a separate fiscal year than the corresponding expenses are incurred.

If a business entity expects to meet the PPP’s forgiveness criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, then it could account for the loan in accordance with FASB ASC- 450-30. Under this model, the earnings impact of a gain contingency is recognized when all the contingencies related to receipt of the assistance have been met and the gain is realized or realizable. As applied to forgivable loans received under the PPP, a business entity would initially record the cash inflow from the PPP loan as a liability. The proceeds from the loan would remain recorded as a liability until the grant proceeds are realized or realizable, at which time the earnings impact would be recognized.

If you have any questions or need assistance applying for loan forgiveness, please contact your Rödl & Partner representative.