GAAP does not include PPP specific rules for reporting the PPP loan and related forgiveness. The accounting profession has looked to its established Accounting Standards Codifications (“ASCs”) to determine how best to treat the PPP loan and the potential forgiveness of the loan. The ASCs used to evaluate treatment relate to debt (ASC 470), extinguishment of liabilities (ASC 405-20), statement of cash flows (ASC 230), and accounting for government grants (ASC 105).
While most of us do not want to study accounting standards, it is important to understand the variety of approaches that may be used, and where to find details on a specific borrower’s implementation of reporting for the PPP loans and PPP loan forgiveness.
Year-end audited financial statements are beginning to be published in the post PPP loan origination world, and the variety of treatments is what was expected. It is imperative that lenders and borrowers understand how the accountant prepared audited financial statements report the PPP loan, expenses paid with the funds, and the potential forgiveness of all or part of the loan balance.
ASC 470: Treatment of Debt AND ASC 405-20: Extinguishment of Debt
ASC 470 indicates debt is reported when incurred, and since PPP loans are a legal form of debt, the PPP loan should be recognized as a liability. Under this ASC, the debt can be derecognized when it is extinguished, which means the creditor has been paid OR the borrower is legally released from being the obligor or borrower.
For a PPP loan to be derecognized, the SBA must have paid the PPP lender the amount owed and the lender has notified the borrower of the forgiveness.
When the debt is extinguished, ASC 405-20 indicates the amount that is forgiven, including accrued and unpaid interest, is reported on the income statement as a gain on debt extinguishment or gain on debt forgiveness.
ASC 230: Statement of Cash Flows
On the statement of cash flows, ASC 230 indicates the amount borrowed under the PPP loan program is reported as a cash inflow from financing activities. Principal repayments are reported as cash outflows from financing activities, and interest payments are reported as outflows from operating activities.
The amount of PPP loan principal forgiven would be reported as noncash financing activities and PPP loan interest that is forgiven would be shown as a reconciling item between net income and cash from operations.
ASC 470, ASC 405-20 and ASC 230
Use of these GAAP reporting guidelines would clearly indicate the amount of PPP loans not yet forgiven is a liability, and clearly report the loan and any forgiveness in the statement of cash flows. Footnotes related to debt or a separate footnote would be expected to provide a summary of this reporting.
ASC 105: Accounting for Government Grants
GAAP does not specifically state how government grants not in the form of a tax credit should be reported in the financial statements. Using guidance from the AICPA (TQA3200.18), a borrower could elect to report the PPP loan as a government grant if the PPP loan meets both 1) the eligibility requirements for a PPP loan, and 2) meets the PPP loan forgiveness criteria for all or substantially all of the PPP loan amount.
If the PPP loan borrower and its accounting firm believe the PPP loan meets the two requirements listed above, then the PPP loan is recognized as a deferred income liability. The borrower then reduces the deferred income liability, the loan, over the period when expenses are recognized that meet the PPP loan forgiveness criteria.
ASC 105 would allow the borrower to either report the income statement impact of the PPP loan forgiveness as a separate line item on the income statement, or by reducing related expenses. PPP loan forgiveness would not be revenue.
If the PPP loan borrower later determines the PPP loan is not forgiven and must be repaid, the amount that is not forgiven would be treated as a change in an estimate.
The statement of cash flows treatment of the PPP loan and forgiveness under ASC 105 could be either in the section of the statement of cash flows where the related expense are reported, or in the financing activities section.
How does a lender know where to look?
If the PPP loan is material, the borrower should have a footnote in the financial statements to explain how the PPP loan and forgiveness are accounted for, and where the amounts are reported in the financial statements.
If the lender knows the borrower has received a PPP loan, the lender should ask where the PPP loan and PPP loan forgiveness are reported on the income statement and the balance sheet. This discussion should include an explanation of how expenses may or may not have been impacted by the reporting conventions the borrower elected to use.
Additionally, if the PPP loan is $2 million or greater, the new SBA guidance related to additional reporting requirements must be considered and will need to be a part of the reporting decision making process used by the borrower and its accounting firm. A link to FMG’s description of that updated guidance is included here: https://www.focusmg.com/post/ppp-loan-forgiveness-update