Meanwhile, companies that have applied for and received Paycheck Protection Program (PPP) funds under the Coronavirus Aid, Relief and Economic Security (CARES) Act can breathe a sigh of relief knowing that these forgivable loans will enable their employees for the stay gainfully employed for the next few weeks.
The next phase will be the issuance of a loan waiver, and that requires several accounting considerations, starting with how a company should account for the revenue from PPP. There are essentially two options.
Since a PPP loan is legally considered a debt, it can be accounted for in accordance with Accounting Standards Codification (ASC) 470 whether or not the loan has been waived. Additionally, if the company expects the PPP criteria for forgiveness to be met in full, it can book the proceeds as if it were a government grant. In any event, PPP beneficiaries should include a clear disclosure of the loan in their financial statements.
Under the ASC 470 or debt model, a company receiving a PPP loan would recognize a liability in full for the proceeds received and accrue 1% interest. Under the debt model, borrowers are required to formally apply for loan relief, including submitting documents to verify the existence and accuracy of qualified expenses. The profit resulting from the loan waiver is measured on the basis of the net book value of the PPP loan, which – if waived – should include accrued interest and unamortized deferred financing costs in relation to the recoverable portion of the loan. This gain should be recorded as a separate line item in the income statement.
For the purposes of the cash flow statement, PPP revenues recognized as liabilities would be reported as cash inflow from financing activities. All amounts repaid would be reported as an outflow of funds from financing activities and amounts waived would be reported as a non-cash financing activity.
When a company moves to the public grant model, if it expects to meet the eligibility and loan waiver criteria, it may essentially account for the yielding PPP loan as a government grant earned by complying with the loan waiver criteria. If the company does not expect to meet the PPP eligibility and loan waiver criteria, the proceeds should be accounted for as debt as discussed above.
US GAAP does not address how for-profit corporations should account for government grants that are not in the form of a tax credit or revenue from a contract with a customer. As such, companies must determine appropriate accounting by analogy with other guidelines. However, a company that accounts for PPP revenue as a government grant must continually reassess its ability to meet the waiver conditions and potentially reverse earnings if it can no longer support a conclusion that it expects to meet the conditions . A nonprofit receiving a government grant should apply ASC 958-605 and recognize loan waiver as a qualifying expense.
Regardless of whether you opt for the debt or the grant model, all related qualifying expenses should continue to be recognized in profit or loss. Payroll, rent, utilities, and mortgage interest are costs that should be reported in the income statement per custom.
We understand – there is much to know about this welcome but sometimes confusing program. Additional regulatory guidance may be in the pipeline, but in the meantime a professional financial services firm should be able to address any issues related to PPP accounting considerations.
Janet Prisloe, CPA, is Industry Partner Leader – Manufacturing and Distribution for blumshapiro. To learn more, visit blumshapiro.com.