There is no shortage of information available related to the forgivable loans that were awarded by the Small Business Administration (SBA) in response to the coronavirus outbreak. These Paycheck Protection Program (PPP) loans have had what seems like constantly changing guidance released about the parameters of the loans and how they will be forgiven. Now that the dust has settled some, how should they be accounted for?

The first step in arriving at the answer to this question is determining the intent of the PPP loan for the organization.

If the intent of the loan was to obtain a bridge loan to take advantage of the low interest rates, this should be recorded as a loan in compliance with FASB Accounting Standards Codification (ASC) 470, Debt.

If the intent of the loan was to have the funds to continue operations and eventually obtain forgiveness, this should be recorded similar to a conditional contribution or a refundable advance in compliance with FASB Accounting Standards Codification (ASC) 958-605 Not-for-Profit Entities: Revenue Recognition.

If the PPP loan is accounted for as a loan, it would be recorded as a financial liability, and interest would be accrued over time. The proceeds from the loan would stay recorded as a liability until one of two things occurs:

  1. The loan is, in part or wholly, forgiven and the organization has been “legally released,” or
  2. The organization pays off the loan to the creditor.

If the loan is partially forgiven, the liability would be reduced by the forgiven amount and a gain would be recorded on full extinguishment.

If the PPP loan is accounted for like a conditional contribution, the funds would be recorded as a refundable advance when they were received. This refundable advance would be reduced and contribution revenue would be recognized once the conditions of the contribution have been substantially met or fully waived.

The requirements for PPP loans include:

  • Headcount
  • Limitations on compensation reduction
  • Spending the funds on qualified expenses to reach certain metrics

At this point, concrete guidance on how to determine if the conditions have been substantially met has not been provided.

Please contact your Hawkins Ash CPAs representative if you have additional questions related to the accounting for PPP loans.

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Rachel Burrow
As an audit manager in the firm’s La Crosse, WI, office, I provide audit services for commercial entities, nonprofit organizations and employee benefit plans.

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