Paycheck Protection Progam Loan Accounting 101

The recent passing of the CARES Act created the Payroll Protection Program (PPP), a new forgivable loan designed to encourage small businesses to retain and re-hire their workforce by providing eight weeks of cashflow assistance. Though there are several restrictions and qualifications associated with who can receive the loan, how to obtain loan forgiveness, and how to utilize the funds, the PPP generally offers a tax-free lifeline to businesses that might otherwise fold due to the economic impact of the Coronavirus pandemic.

If your business has been granted a PPP loan, you may be wondering how the loan should be accounted for and what the potential financial statement impacts may be. Although the Small Business Association (SBA) has not yet released official guidance on loan forgiveness protocols, nor has the FASB released guidance on accounting for loan forgiveness, the legislation does outline some key points to guide your initial steps.

Two essential steps for PPP accounting

The first step in accounting for a PPP loan should be accounting for any loan origination costs. While the CARES Act prohibits banks from charging any origination fees on PPP loans, many businesses will retain legal counsel or hire a financial advisor, like Aprio, to assist with evaluating the complex qualifications for these loans. Any such associated costs should be capitalized and recorded as a reduction of the total debt balance.

The second step is the accrual of interest. While the CARES Act ensures that no loan payments will be required for six months, interest still accrues at the statutory 1% rate during that time. Businesses should record the interest when incurred, and any loan costs would be amortized and included in interest expense over the loan term, which is mandated to be two years.

However, if your company adheres to the CARES Act stipulations for PPP loan forgiveness, the initial loan and accrued interest may never need to be repaid. For businesses that exclusively utilize 75% of PPP funding for payroll and the remaining amounts for rent, mortgage interest, and/or utilities, the loan may be fully forgivable.

PPP loan forgiveness accounting options 

The PPP loan forgiveness is where accounting for PPP loans becomes less clear. FASB is currently discussing the SBA loan terms in an effort to provide financial statement issuers guidance on accounting matters.  Here are the two primary options being considered:

Option 1: Once loan forgiveness is obtained, recognize a gain as other income

This first approach theorizes that loan forgiveness may not be granted until after the end of the 8-week loan period, at which point debt is eliminated all at once. Normally, debt forgiveness results in a gain that is reflected as other income. Since the loan forgiveness is not certain until it actually happens, the entity should record the debt when funds are received and then when loan forgiveness is approved, write-off of the loan and associated accrued interest.  Any unamortized loan costs would be offset against that gain.

Option 2: Recognize income while loan funds are spent, assuming loan forgiveness

This second approach theorizes that forgiveness will be granted over the course of the eight-week loan period. The company will record deferred income for the proceeds received and recognize income as funding is spent on eligible payroll and rent expenses. This option is based on guidance for accounting for government grants. Under this approach, the funding is considered a government grant and no debt is recorded.

The bottom line

If you have received a PPP loan, or if you have recently applied, it will be crucial to track spending as the use of the funds will be part of the forgiveness process. These upfront considerations on accounting for PPP loans can help monitor your eligibility for full loan forgiveness according to the SBA and other legislative requirements.

This planning process can be overwhelming, but Aprio’s advisors are here to help you plan what’s next. If you have any questions, contact your Aprio advisor.