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Congress established the Paycheck Protection Program (PPP) to provide relief for small businesses as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES), and there have been a lot of questions and uncertainty around the program.  The AICPA has recently issued guidance on how to account for PPP loans.  Nongovernmental businesses (excluding not-for-profit entities) can either follow Accounting Standards Codification (ASC) 470, debt; or International Accounting Standards (IAS) 20, accounting for government grants.  Under ASC 470, the loan would be accounted for as follows:

  • Initially record the cash inflow from the PPP loan as a financial liability and accrue interest
  • Do not impute additional interest at a market rate
  • The amount would continue to be carried as a liability until either:
    • The loan is partly or wholly forgiven, and the debtor has been legally released from the debt
    • The debtor pays back the loan
  • Reduce the liability by the forgiven amount and record a gain on extinguishment once the loan is partly or wholly forgiven and legal release is received.

If an entity expects to meet the PPP’s eligibility criteria and concludes that the loan represents a grant that is expected to be forgiven, the entity may account by analogy to IAS 20.  This means that they would not be able to recognize government assistance until there is a reasonable assurance that any conditions attached will be met, and the assistance will be received.  Under this method, the business entity would record the cash proceeds as a deferred income liability, and then offset that through earnings.  This would be presented as either a credit on the income statement (either separately or under a general heading such as “other income”), or as a reduction of the related expenses to the related costs, like “compensation expense”.

Not for profit entities would account for PPP loans as a conditional contribution.

Nongovernmental entities with material PPP loans should adequately disclose their accounting policy for such loans and the related impact to the financial statements.