Article written by:
Jeff Harden, CPA
Director, Assurance & Business Advisory Services
As the government continues to implement and propose new measures to help companies manage the economic consequences of the COVID-19 pandemic, questions have been raised as to how such assistance should be accounted for. The accounting and financial reporting implications can vary depending on whether the assistance is considered a loan, a grant or income tax benefit, among others. With approvals and funding of Payroll Protection Program (PPP) loans ongoing, the following summarizing the key accounting considerations that entities should be cognizant of.
Currently, there is no guidance under U.S. GAAP that specifically addresses the accounting for a forgivable loan from a government entity; however, we expect that clarifying guidance will be forthcoming. At this time, we believe that PPP loans should be accounted for as a debt instrument with the primary elements of such accounting summarized as follows:
- Proceeds from PPP should be recorded as debt within the balance sheet.
- As with other forms of debt and related issuances, costs paid to third-parties may be deferred and amortized over the term of the debt. Example costs include document preparation costs, accounting and legal fees, and other external, incremental expenses paid to advisors.
- Although interest and principal payments are deferred for six months, interest should be accrued at the stated rate of 1% on a monthly basis. It is possible this interest will be eligible for forgiveness; however, guidance is not clear on this.
- While the PPPL provides for debt forgiveness, the costs of qualified expenses should continue to be accounted for through earnings, consistent with existing policies. Specifically, payments for payroll, rent, utilities and interest related to mortgage debt are recognized costs in the income statement and not reductions of the PPP, nor otherwise reflected on the balance sheet, during the 8-week forgivable measurement period.
- Under U.S. GAAP, a debt instrument is considered extinguished (i.e. derecognized) only if the borrower is legally released from being the primary obligor. As it relates to PPP, borrowers must formally apply for loan forgiveness and submit certain documentation verifying the existence and accuracy of qualified expenses. As such, the PPP liability is derecognized from the balance sheet only upon formal forgiveness of the debt.
- The resulting gain on forgiveness is measured based on the net carrying value of the PPP loan, which includes accrued interest (if eligible) and deferred finance costs relating to the forgivable portion of the loan. Within the income statement, this gain is presented as a separate line item. Because current standards do not specify where in the income statement debt extinguishment gains and losses should be presented, there is diversity in practice. We anticipate clarifying guidance will be forthcoming, and accepted practice to emerge, with respect to such presentation within the income statement.
To learn about the key elements of forgiveness under the Paycheck Protection Program, click here.