Although there is currently no specific guidance in U.S. generally accepted accounting principles (“US GAAP”), there are currently two directions being discussed for recognition of the PPP loan forgiveness. The American Institute of Certified Public Accountants and the Financial Accounting Standards Board have issued guidance for nongovernmental entities, stating that without more formal guidance from regulatory bodies, the different components of PPP loans should be accounted for based on existing guidance in both current U.S. GAAP (ASC) or International accounting standards (IAS). The two interpretations of existing standards being discussed are as follows:
ASC 470
Under this method, Companies treat the funds as a loan on the balance sheet and should accrue interest at the fixed 1% interest rate monthly. Once the PPP Loan is formally forgiven, the loan is removed from the balance sheet and recorded as a gain, including all accrued interest to date, on the income statement for the period the loan was forgiven. All associated costs in connection with the debt relief (rent, payroll, interest, utilities) should be accounted for consistent with current accounting policies.
IAS 20 and ASC 958-605
The International Accounting Standards, which coincides with existing nonprofit standards under ASC 958-905, states that for-profit (following IAS 20) and nonprofit (following ASC 958-605) entities can treat the funds like a grant and defer the revenue until the expenses are incurred that satisfy the terms of the grant. Under this method, cash received should be recorded as deferred grant income or conditional grant liability (a liability on the balance sheet). Once there is “reasonable assurance” that forgiveness will occur, the Company can reduce the deferred income liability and record revenue to the income statement. The revenue would be recognized ratably over the same period that the Company incurred the related expenses (rent, payroll, interest, utilities).
Each method could have a significantly different impact on your Company’s financials. If you have any questions, please do not hesitate to reach out your trusted advisor at Reese Henry.