Great news! Your company has been approved for the Payroll Protection Program (PPP) loan. Now what? For some companies, this may be the first time you’ve taken out a loan. And, since you expect to have expenses that qualify for the loan to be forgiven in whole or in part, you may be wondering if you really have to account for this as a loan on your books.
Currently, there is no specific guidance under generally accepted accounting principles in the United States (GAAP) that addresses how to account for a forgivable loan from a governmental entity. While we expect that clarifying guidance will be forthcoming, we believe that the PPP loans should be accounted for as a debt instrument in accordance with GAAP. Following are some of the key elements in accounting for debt:
- Record the proceeds as debt on the balance sheet.
- The PPP allows for deferral of the loan payment for 6 months, including principal and the 1% interest. While it’s not yet clear if the interest will be part of the loan forgiveness, you would accrue for this interest expense in your income statement on a monthly basis.
- The expenses that you incur toward the forgiveness of the loan, including payroll costs, interest on mortgages, rent and utilities, will still be classified as expenses in your income statement. They are not considered reductions of the PPP loan. In order to appropriately track these expenses separately from your other similarly classified expenses, we recommend that you utilize your accounting software or another tracking tool, so that you can easily provide the required documentation to your lender to support the forgiven portion.
- At the end of the 8-week forgiveness period, the PPP requires that you formally apply for loan forgiveness and submit the required documentation. Once you are formally notified by your lender of the amount that has been forgiven (i.e. legally released), you can now remove that portion of the liability from your books.
- The amount that is forgiven will be reported as revenue in your income statement at the carrying value of the PPP loan plus the accrued interest (if eligible). The classification of the revenue on your income statement may vary depending on your type of entity. For example, for-profit businesses may classify the forgiven amount as a gain, while not-for-profit organizations may treat it as grant revenue. This area is not yet clear.
The COVID-19 pandemic has created many challenges in all aspects of our daily lives. While accounting for the PPP funding that your business receives may not be at the top of the list, it is something that you’ll want to make sure to consider so that when the 8-week forgiveness period comes to an end and you apply for the loan forgiveness, you can feel confident that you have the proper documentation.
From a GAAP financial reporting standpoint, whenever there is a lack of clear guidance or a diversity in practice, we expect clarifying guidance to be issued. So, while some aspects may be unclear now, we are hopeful that answers will be provided soon.
To discuss how to account for your PPP loan, contact your Kerkering Barberio team member at (941) 365-4617 or visit our website at https://www.kbgrp.com/resources/covid-19-updates.