Accounting for PPP Loans

September 28, 2020 by Jason Frick
Copeland Buhl

As the seasons turn towards fall and tax deadlines begin to fade away, we have had an increased number of questions regarding accounting for loans made under the Paycheck Protection Program (PPP).  The intention of this blog is not to discuss the loan program itself or related forgiveness process.  Instead, we will outline the general accounting treatment associated with the loan for most business entities.

A quick reminder, the Paycheck Protection Program was created by the CARES act in late March 2020 and consisted of formal loans to qualifying businesses that were fully forgivable by the Small Business Administration if certain conditions were met.  In June, the Paycheck Protection Program Flexibility Act modified and extended certain provisions of the program including extending the spending period for employers to 24 weeks.  Additionally, the forgiveness process could take up to 150 days as the lender has 60 days to determine forgiveness and the SBA has 90 days. 

This extended timeline not only impacts the fall fiscal year-ends, but also will likely be an issue for calendar year-ends as the forgiveness of PPP loans will likely still be in process until 2021.  This raises the question of what the proper accounting treatment is for a PPP loan.  While there has not been any formal guidance issued regarding this program, the AICPA issued a Technical Q&A regarding this topic.  Most business entities will utilize ASC 470, which outlines the accounting treatment associated with debt.  Upon receipt of the funds, a liability would be recorded for the full amount of the proceeds like any other loan.  This liability would not be relieved until the entity has been legally released from it by the lender and SBA.  As this likely will not happen until after year-end a liability would still exist as of the balance sheet date.  A determination on forgiveness after year-end would be considered a Type II subsequent event, which would be disclosed in the financial statements but not change the presentation of the financial statements. 

The FASB could issue more specific guidance in coming months and it is possible some form of “blanket” forgiveness could be enacted by the US Congress which could impact an entity’s accounting for PPP loans.  In absence for that, you should be prepared to potentially show the PPP loan on the balance sheet at year-end and be proactive about the ramifications of that presentation on debt covenants.  Please contact your Copeland Buhl advisor if you have questions and stay tuned for any potential changes.