As more companies are receiving PPP loan forgiveness approval, many are asking how to account for it. The AICPA (American Institute of Certified Public Accountants) issued guidance on this topic in the form of TQA (Technical Question and Answer) 3200.18. To start, we will summarize the TQA, which primarily refers to two existing standards. The first option treats the loan as debt and the second option treats the loan as a government grant. Regardless of which option you choose, the proceeds of PPP funds should initially be recorded as a liability with interest accrued at the stated interest rate.
- Under ASC (Accounting Standard Codification) 470, Debt, 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. If the former criteria is satisfied, the liability would be reduced by the amount that is forgiven, and a gain would be recognized. This gain would typically be recorded as “Other Income.”
- The TQA also allows companies to treat loan forgiveness as a government grant, by applying IAS (International Accounting Standard) 20, Accounting for Government Grants and Disclosure of Government Assistance. It should be noted that the company is not required to report under IAS to be able to apply this standard. A company can apply IAS 20 if it expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents a grant that is expected to be forgiven. Under this model, government assistance is not recognized until there is reasonable assurance that (1) any conditions attached to the assistance will be met AND (2) the assistance will be received. Once there is reasonable assurance that the conditions will be met, the earnings impact of the “grant” is recorded “on a systematic basis over the periods in which the company recognizes the related costs for which the grant is intended to compensate.”
What does all of this mean?
Option 1 is pretty straight-forward, so we’ll dive deeper into option 2. Under IAS 20, the grant can be recorded either as an offset against related expenses, such as compensation expense or as other income. Here are some examples of specific scenarios to systematically apply PPP loan forgiveness to related costs.
- You have employees who were paid but not working for a period of time. Under IAS 20, you can quantify this “idle compensation” and apply loan forgiveness directly against the related accounts.
- You have underutilized employees, which has impacted your profit margins and/or overhead rates. Under IAS 20, you can apply loan forgiveness to “normalize” your margins and overhead rates and maintain comparable financial reporting.
- You have identified and accumulated nonrecurring COVID-related costs into specific accounts. Under IAS 20, you may apply loan forgiveness directly against these accounts. We would equate this example to treating the forgiveness as other income.
- After you have systematically quantified and applied PPP funds, anything remaining would be recognized as other income.
It is also important to note that IAS 20 allows the grant to be recognized over the periods in which costs are incurred. Meaning, if you conclude there is reasonable assurance that the conditions of loan forgiveness will be met, you can apply forgiveness to interim reporting periods. This allows companies with monthly or quarterly reporting requirements to present normalized financial information during these interim periods.
As you know, the PPP loan program has been a moving target for several months. For questions about loan forgiveness, tax implications, and other related topics, please reach out to Chad Bumbaugh and/or Steve Snyder. We also invite you to view our most recent PPP related webinars on-demand.
Darren Welker, CPA | Managing Director, Manufacturing & Distribution Group
At the helm of our Manufacturing and Distribution Group, Darren provides solutions that extend beyond tax and accounting. Under his leadership, Darren’s clients benefit from his specialized focus on strengthening operations for enhanced profitability.
Working in the industry for over 20 years, Darren has collaborated with clients at various phases of their growth from start-up through global expansion. Recognizing the unique and ever-changing landscape of manufacturing and distribution, Darren stays abreast of emerging trends and provides sound recommendations that allow clients to make more impactful decisions. Connect with Darren.