AICPA Releases Guidance on Borrower Accounting for PPP Loans
June 11, 2020
By Christopher Park
As part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that was passed by Congress and signed into law by President Trump on March 27, 2020, the Paycheck Protection Program (PPP) was created. The PPP authorized the Small Business Administration (SBA) to process loans for eligible businesses of up to $10 million. PPP loans are designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if the proceeds are used for prescribed purposes. Loan payments are deferred for six months and the loan matures in two years with an interest rate of 1% if not forgiven.
As borrowers have taken these PPP loans, the question of how to account for them has come to the forefront. There is no specific authoritative guidance within the FASB codification related to loans of this nature and, as such, there is potential for diversity in practice. As a result, in June 2020, the AICPA released Technical Question and Answer (TQA) 3200.18 to provide non-authoritative guidance on how a nongovernmental entity should account for a forgivable loan received under the PPP.
In summary, an entity can account for the loan as debt under ASC 470 or, if it is expected with some certainty to meet the criteria for loan forgiveness under the PPP, the loan may be accounted, in substance, as a government grant (by analogy to IAS 20 and ASC 958-605 for a business entity or under the guidance of ASC 958-605 for a not-for-profit entity). Regardless of accounting treatment, clear and robust disclosures in the financial statements of the entity’s accounting policy for the PPP loan and the related impact is necessary.
While the guidance within this TQA is non-authoritative, it has been reviewed by the FASB and GASB staff as well as the Office of the Chief Accountant of the SEC. As such, our expectation is that this guidance will apply to all entities (public and private; for-profit and not-for-profit).
Please reach out to your trusted professional advisors for any questions on the application of this guidance.