By Nicole K. Cradic, CPA

As a means of aiding businesses hurt by the COVID-19 pandemic, the federal CARES Act included the Paycheck Protection Program (PPP). The PPP which established a fund for Small Business Administration loans that could be forgiven if certain conditions geared toward employee retention are met. Despite widespread awareness of the program, questions remain. The AICPA recently provided guidance on one of them: How should an organization account for PPP loans? To address this, the AICPA’s Center for Plain English Accounting (CPEA) published “Accounting in the Fog of War – Treatment of PPP Loans.”

There is essentially no guidance in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) that exactly fits the terms and conditions of the PPP loans. U.S. Generally Accepted Accounting Principles (U.S. GAAP), in general, lacks accounting guidance for for-profit entities with respect to government grants. The CPEA’s report provides accounting solutions through analogizing existing guidance for similar circumstances and referencing nonauthoritative guidance. What I include here could be superseded with more authoritative guidance by the AICPA or the FASB down the road, but in the meantime the guidance from the CPEA is a great resource. It is especially useful for entities that need to issue interim or annual financial statements before the ultimate PPP loan forgiveness decision has been communicated.

With respect to for-profit organizations, the CPEA points practitioners to four models to consider for the accounting for PPP loans:

• FASB ASC 958-605 government grant model
• International Accounting Standard (IAS) 20 model on government assistance
• FASB ASC 470 debt model
• FASB ASC 450-30 gain model

As a matter of practicality, the first and third model are likely the prevalent choices, as they are supported by robust accounting guidance of the U.S. GAAP framework that practitioners are already familiar with. The selection of one over the other is dependent on the likelihood of ultimate loan forgiveness. Here, I explore those two models in a bit more detail.

FASB ASC 958-605 Government Grant Model

Through this approach, for-profit entities would analogize the accounting treatment with the not-for-profit U.S. GAAP guidance for contributions. Contributions, as defined, can include the cancellation of liabilities. This model is founded on the premise that the substance of PPP funds is a government grant delivered in the form of a forgivable loan. The CPEA report arrives at the recommendation to recognize the PPP loan proceeds into income as eligible expenses are incurred – provided that an entity has high confidence that the PPP loan proceeds will be forgiven. An entity could follow this treatment for the PPP loan portion for which it has high confidence of forgiveness and follow the debt model outlined below for the remainder of the loan proceeds. The journal entries would be as follows:

FASB ASC 470 Debt Model

The debt model follows traditional loan accounting. The PPP loan proceeds would be recorded as a liability – like any other bank debt – and interest would also be recorded. Once the entity is legally released as the primary obligor from the creditor, the liability would be derecognized and a gain on “PPP loan extinguishment” would be recorded. An entity could follow this treatment for PPP loans when there is more than remote likelihood that the loan proceeds will not be forgiven. Here are some of the journal entries that would be recorded – those related to routine interest expense and debt service payments are omitted:

It is recommended that practitioners review the applicable U.S. GAAP provisions for these accounting models in more depth because not all nuances are covered in this summary.

When U.S. GAAP does not provide one exclusive accounting treatment for a transaction, as is the case here, the significant accounting policies footnote should describe the policy that an organization applies.

This summary focuses on the accounting for PPP loans under U.S. GAAP. Further consideration needs to be given to the accounting for these loans when an entity uses a different basis of accounting. As an example, an entity that is reporting under the income tax basis (ITB) of accounting could not use the government grant accounting model noted above. As of the writing of this summary, the PPP loan would need to be presented as debt until legally forgiven. Currently, expenses paid for with loan proceeds are not tax deductible. For ITB financial statements, you would still include those nondeductible expenses.

Nicole K. Cradic, CPA, is an audit and attest partner with Trout CPA in Lancaster, Pa. She leads the firm’s quality control committee and is a member of PICPA’s Accounting & Auditing Procedures Committee. She can be reached at ncradic@troutcpa.com.

More COVID-19 updates can be found on PICPA's Coronavirus Resources and Updates page.

Other CPA Now PPP blogs include:

• The Voice of the CPA Profession Gets Tax Fix Done! by Peter Calcara and Alex Fabian
• CPAs: Start Preparing Now for PPP 2 by Jennifer Cryder, CPA
• Making the Most of the Loosened PPP Loan Regulations by Mark Banks, CPA, CFE, MAFF
• PPP Loan Forgiveness Workbook: B&R’s Life Raft for Businesses by Mark Banks, CPA, CFE, MAFF 

Sign up for weekly professional and technical updates from PICPA's blogs, podcasts, and discussion boards by completing this form.