On June 10, 2020, the AICPA released guidance to address how borrowers of Payroll Protection Program (PPP) Loans should account for these loans in their GAAP financial statements.
The legal form of the PPP loan is debt, however, some believe that the loan is, in substance, a government grant. These conflicting opinions have led the AICPA to provide PPP Loan borrowers with options to account for the PPP Loans. Borrowers can account for the PPP Loans as:
As Debt and accrue interest. The proceeds from the loan would remain recorded as a Debt until either:
- the loan is, in part or wholly, forgiven and the borrower has been “legally released” or
- the borrower pays off the loan to the creditor.
If forgiven, the borrower would reduce the Debt by the amount forgiven and record a “gain on extinguishment”.
As a grant, in which the borrower would record the PPP loan as a deferred income liability and would reduce the liability, with the offset through earnings, presented as either:
- a credit in the income statement, either separately or under a general heading such as “other income,” or
- a reduction of the related expenses, as it recognizes the related cost to which the loan relates.
If the borrower expects the PPP loan forgiveness criteria to be met the borrower could account for the PPP loan as:
A contribution: borrower that chooses not to follow Option 1, would initially record the PPP loan as a refundable advance. The borrower would then reduce the refundable advance and recognize the contribution once the conditions of release have been substantially met or explicitly waived.
A gain contingency: the borrower would initially record the PPP loan as Debt. The loan proceeds would remain as Debt until the loan proceeds are realized or realizable, at which time the earnings impact would be recognized.
In summary, all borrowers may follow Option 1 under all circumstances. If a for-profit borrower believes they will meet the PPP loan’s eligibility criteria for forgiveness, they may choose to follow Option 2, 3, or 4. Not-for-profit borrowers may choose to follow Option 3 if they believe the loan is a grant that is expected to be forgiven. All borrowers should adequately disclose their chosen policy and the related effects on the financial statements.