7.10.20 | Vision 2020 – COVID-19 Update
CARES Act Briefing
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides significant relief for small businesses by authorizing the Small Business Administration to provide 100% guarantees for loan commitments to help small businesses pay operational costs like payroll, rent, interest, and health benefits by creating the Paycheck Protection Program (PPP). Eligible recipients could receive a maximum unsecured loan amount of up to $10 million with payments deferred for a certain period, a 2-year term (extended to 5 years by the Paycheck Protection Program Flexibility Act) and an interest rate capped at 1%. Subject to certain conditions, these loans could be forgiven in part or in their entirety.
Accounting for a PPP Loan under GAAP
With the PPP in its final stretch, many are questioning the accounting treatment of the forgivable loan received under the PPP. According to the recent guidance issued by the American Institute of Certified Public Accountants (AICPA), a nongovernmental entity that is not a not-for-profit entity (that is, it is a business entity) can account for the forgivable loan under the PPP in the following four ways for books maintained in accordance with the generally accepted accounting principles in the United States of America (GAAP):
- Using Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) 470, Debt
- Using an analogy to International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance
- Using an analogy to FASB ASC 958-605, Revenue recognition for Not-for-Profit Entities
- Using FASB ASC 450-30, Gain Contingencies
The table below summarizes the GAAP accounting treatment of the forgivable loan under the PPP:
|Situation||ASC 470||IAS 20||ASC 958-605||ASC 450-30|
|Initial accounting of loan received||As a financial liability (debt)||As a deferred income (liability)||As a refundable advance (liability)||As a liability|
|Derecognition of liability for the portion of the loan that is forgivable or has been forgiven||Only when (1) the loan is, in part or wholly, forgiven and the debtor has been “legally released” or (2) the debtor pays off the loan to the creditor.||Only when there is a reasonable assurance (similar to the “probable” (the future event or events are likely to occur) threshold in GAAP) that (1) any conditions attached to the assistance will be met and (2) the assistance will be received (not applicable in case of loan received under the PPP).||Only when the conditions are substantially met or explicitly waived||A gain contingency is defined as "An existing condition, situation, or set of circumstances involving uncertainty as to possible gain to an entity that will ultimately be resolved when one or more future events occur or fail to occur." A gain contingency should be recognized only when the gain is realized or realizable 1 (this is a stricter threshold than "probable").|
|Income statement effect for the portion of the loan that is forgivable or has been forgiven||Record a gain on extinguishment of debt||(1) A credit in the income statement, either separately or under a general heading such as “other income,” OR |
(2) A reduction of the related expenses, as the entity recognizes the related cost to which the loan relates
|Recognize contribution income||Recognize income|
It should be noted that under ASC 470 and ASC 450-30, the liability cannot be derecognized until the lender determines the amount eligible for forgiveness. However, under IAS 20 and ASC 958-605, the liability can be derecognized when all the conditions related to the loan forgiveness are substantially met even if the lender has not actually determined the forgiveness amount as of the financial statement date.
The AICPA further clarified that if the PPP loan is accounted for using ASC 470, the interest would be accrued on the loan in accordance with the interest method under FASB ASC 835-30. However, the interest will not be imputed using the market rate.
Accounting for a PPP Loan under Tax Basis of Accounting
For entities that maintain their books under the income tax basis of accounting, PPP loan proceeds should be recorded as a debt (liability) until the lender determines the amount eligible for forgiveness. Once the lender makes the determination of the forgiveness amount, the liability will be reversed, or derecognized to that extent. This accounting treatment is similar to treatment under FASB ASC 470 noted above. However, pursuant to the CARES Act, forgiveness of the PPP loan is not considered a taxable income. Moreover, and unless Congress acts or the IRS reverses its published position, expenses paid with forgiven PPP loan proceeds are not deductible for tax purposes. Treatment of both the loan forgiveness and the associated expenses should be disclosed in the financial statements.
Both the GAAP and tax basis treatments of these loans and their forgiveness requirements, especially under certain GAAP treatments, may be subjective in nature, which will require documentation by your auditors and accountants. Before undertaking the accounting for loan forgiveness, it is suggested that organizations contact their accounting and tax advisors to discuss the guidance and the required documentation in detail.
For more information on this topic or any other matter related to the COVID-19 pandemic, please contact your Berdon advisor and visit Berdon’s COVID-19 Information Center.
Berdon LLP, New York Accountants
1 Revenues and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash.