My PPP Loan Has Been Forgiven – Now What?!?!

An overview of accounting for PPP loan forgiveness for statutory insurance companies

When the Paycheck Protection Program (“PPP”) was rolled out in April of 2020, the insurance industry, like many others, took advantage of the potentially forgivable loans it made available. S&P reports that more than 140 insurance companies received approval to borrow under the program.

While the AICPA has issued specific guidance regarding the accounting and reporting for the forgiveness of PPP loans under U.S. GAAP, the NAIC has not yet released any formal guidance, leading many statutory filers to ask “Now what?” when their PPP loan is formally forgiven and it comes time to record the forgiveness in the statutory financial statements. Should the forgiveness be recorded as a reduction of other underwriting expenses? A direct increase to unassigned surplus? Other income? The answer lies within Statement of Statutory Accounting Principles No. 15, Debt and Holding Company Obligations (“SSAP No. 15”) which establishes the general statutory accounting principles for recording debt and related items.

Paragraphs 11a and 11b of SSAP No. 15 lay out the requirements for determining when an extinguishment of debt has occurred:

11. A reporting entity shall derecognize a liability if, and only if, it has been extinguished. A liability has been extinguished if either of the following conditions is met:

1. 1. The reporting entity pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes delivery of cash, other financial assets, goods or services, or reacquisition by the debtor of its outstanding debt securities; or
   2. The reporting entity is legally released from being the primarily obligor under the liability, either judicially or by the creditor.

Based on the above, once a company has received a formal notification of forgiveness from its lender, it has now met the criteria for extinguishment under Paragraph 11b and the liability may be derecognized in the financial statements.

Paragraph 25 of SSAP No. 15 requires that “gains and losses from extinguishment of debt be reported as capital gains or losses, and charged to operations”. As a result, the forgiveness of the PPP loan should be recorded as a gain or other income item within the statement of operations.

While there may be variety in practice as to the geography of the gain from extinguishment within the statement of operations, we believe that it is most appropriate to record the gain separately from net investment gains, as it is not investment-related. Speak to your advisors regarding any questions you may have on this.