Accounting for PPP loans
The ever-evolving CARES Act Paycheck Protection Program (PPP) loan guidance has yet to include specific accounting treatment for the recording and recognition of the related funds. We expect that clarifying U.S. GAAP guidance will emerge for the accounting treatment of the loans themselves, as well as for the related forgiveness. We acknowledge that in the absence of clearly defined guidance, PPP loans are being funded and therefore we will provide a summary of the accounting treatment in accordance with U.S GAAP, as currently in effect.
Accounting for initial funding of the PPP loan:
- The cash received should include an offsetting entry to Note Payable- debt on the balance sheet, for the full amount of the loan proceeds received.
- Costs associated with obtaining the PPP funds, if material, may be set up as a deferred financing cost which reduces the carrying amount of the debt. These costs should be amortized over the term of the loan (initially two years).
- These costs include legal fees, accounting fees, advisory fees and any other costs incurred directly associated with receiving the PPP loan funds, and not otherwise reimbursed as agent fees by the lender.
- Interest payable should be set up to accrue at an annual rate of 1%.
- Note that although this is considered a below-market interest rate, interest should not be imputed on these loans.
- Interest should begin accruing on day one, regardless of the six-month deferral period.
Accounting during the covered 8-week loan period:
- No principal payments will be made during this time; the note balance will remain unchanged.
- Interest will continue to accrue at a rate of 1%.
- All qualified expenses (i.e. payroll costs, rent, utilities, mortgage interest, etc.) will continue to be recognized through the income statement and have no impact on the balance of the loan.
- The above items should be paid and expensed in accordance with company policy.
Accounting at the time of loan forgiveness:
- After the borrower has applied for loan forgiveness, the lender has sixty days to notify the borrower of the amount forgiven. This forgiven portion will be considered “extinguished debt” once the borrower has received legal notification from the lender.
- The forgiven portion is accounted for by reducing the loan balance, net of carrying costs, and reversing the accrued interest (if the forgiven portion includes the accrued interest).
- The gain recognized on the forgiveness of the debt transaction should be recorded on the income statement as “debt extinguishment” or “forgiveness of debt.”
- Under the PPP the income recognized for the forgiveness of debt is NOT taxable to the borrower. However, deductions, up to the amount of the loan forgiveness, are not tax-deductible.
- The remaining unforgiven balance of the loan continues to be carried on the balance sheet as Notes Payable-debt, and will accrue interest at 1% for the remainder of the loan term. The balance of the debt would be paid down as principal payments on the loan are made, in accordance with the terms of the arrangement.
For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.