June 30 represents a common fiscal year-end, a reporting cycle under bank covenants, and the mid-year point for the calendar year. While many of the Paycheck Protection Program (PPP) loan funds were received in March and April, use of funds and the approval of forgiveness by the bank are likely to occur in different reporting periods. Understanding the two models for recognition of forgivable loans received under the PPP presented by the AICPA’s Technical Question and Answer (TQA) 3200.18 is important in order to determine the most appropriate accounting model at June 30, 2020, or at any year-end period when the amount of expected PPP loan forgiveness has not yet been granted.
The TQA provides two models under which to recognize the forgiveness of the loans:
Debt Model:
- The entity follows the guidance in Financial Accounting Standards Board (FASB) ASC Topic 470 to treat the loan like other debt.
- The PPP loan is initially recorded as a liability and interest is accrued in accordance with the agreement (not at the market rate). The entity will continue to record the proceeds as a liability until either (1) the loan is partly or wholly forgiven and the entity has been legally released as the obligor or (2) the entity pays off the loan. At this point, the entity records a gain on extinguishment, in the amount of the forgiveness.
- Benefits: The forgiveness does not need to be estimated at an interim period. The gain is recognized at the time the entity is legally released.
- Drawbacks: The expenses that are incurred in the use of the funds are likely to occur in a different period than the gain on the forgiveness of the loan.
Grant Model:
An entity uses analogy to International Accounting Standard 20 and/or FASB ASC Topic 958-605 conditional grant recognition to treat the PPP loan as a government grant that is expected to be forgiven.
- The entity would initially record the cash inflow from the PPP loan as a refundable advance. The entity would then reduce the refundable advance and recognize the gain as the related eligible costs are incurred (as the conditions are met).
- Benefits: Gain on the forgiveness is recognized as the expenses are incurred. The entity does not have to wait for the loan forgiveness application to be approved by the bank.
- Drawbacks: Management must estimate the expenses that qualify for forgiveness at the interim period; there is a risk that gain may be recognized early for expenses that do not qualify.
The entity should consider the users of the financial statements and method of recognition that best presents their intended use of the funds. Additionally, it is important to disclose the accounting policy used to recognize the loan forgiveness and explain the method to financial statement users.
If you have questions or would like more information, please contact Kelly Buck at kbuck@windes.com or 844.4WINDES (844.494.6337).
