10 financial reporting reminders for PPP borrowers

Andrea M. Meinardi, Sean C. Prince
3/29/2021
10 financial reporting reminders for PPP borrowers

PPP borrowers are in various stages of reporting on PPP loans and applying for loan forgiveness. These 10 reminders can help borrowers move forward.

Organizations participating in the Paycheck Protection Program (PPP) have arrived at an interesting junction. Many PPP borrowers are in different stages with their loans. Some are focused on 2020 financial reporting related to their first-draw loan, while others are finalizing 2021 applications for first- or second-draw loans. Some are still applying for forgiveness, some are awaiting notification of forgiveness, and others have already received it. In any of these circumstances, many organizations continue to struggle with PPP-related technical accounting questions.

No matter where they are in the process, organizations should maintain quality reporting for their PPP loans – their forgiveness might depend on it. Here are 10 best-practice reminders for finance teams, including sections on closing out 2020 PPP reporting and for moving forward with PPP loans in 2021.

Closing out 2020 PPP reporting

1. Get clear on how the timing of forgiveness affects PPP financial reporting.

Here are a few common scenarios to understand:

For PPP loans accounted for as debt (ASC 470)

  • If an organization has not received formal notification of forgiveness from the Small Business Administration (SBA) prior to the reporting period end, the loan should be presented as a financial liability in its balance sheet and classified as current or noncurrent in accordance with its contractual terms. This treatment holds true even if forgiveness is expected to be received shortly after the period end. The PPP loan also should be included in the organization’s debt maturity disclosure (see ASC 470-10-50-1).
  • If forgiveness is received before issuance of the financial statements but after the reporting period end, the loan still must be presented as a financial liability, but the entire balance may be classified as noncurrent. In addition, an entity may choose to not include its PPP loan within its debt maturity disclosure; however, such election should be disclosed along with the fact that the PPP loan has been formally forgiven.

For PPP loans accounted for as a grant (ASC 958-605 or IAS 20)

  • The receipt of formal notification of SBA forgiveness will generally have no impact on an organization’s financial reporting. For example, if the PPP loan was accounted for as a grant under IAS 20, the organization would have derecognized the loan as the related costs for which the loan was intended to compensate (such as payroll expenses) are incurred.

2. Accurately present the PPP loan in the statement of cash flows.

For PPP loans accounted for as debt (ASC 470)

  • The receipt of PPP funds is treated as a cash inflow from financing activities.
  • If required, the repayment of PPP funds is treated as a cash outflow from financing activities.
  • The forgiveness of PPP funds is disclosed as a supplemental noncash activity.

For PPP loans accounted for as a grant (ASC 958-605 or IAS 20)

  • The receipt of PPP funds is treated as either a cash inflow from operating activities or a cash inflow from financing activities.
  • If required, the repayment of PPP funds is treated as either a cash outflow from operating activities or a cash outflow from financing activities (matching whichever was used for the cash inflow).
  • The forgiveness of PPP funds is disclosed as a supplemental noncash activity.

3. Prepare thorough disclosures. Financial reporting should include comprehensive disclosure on material PPP loans with transparency about:

  • The terms and conditions of the PPP loan
  • How the organization has chosen to account for the loan – for example, as debt under ASC 470 or as a grant under IAS 20.
  • If accounted for as debt, the relevant disclosures required by ASC 470 (for example, debt maturity table)
  • The financial statement line items – and relevant amounts – impacted by the accounting for the PPP loan
  • The organization’s expectation of being forgiven, including whether forgiveness has been received or the application for forgiveness has been filed
  • Risks of meeting eligibility and forgiveness requirements, including the SBA’s ability to audit

4. Prepare documentation to support the forgiveness application and loan eligibility. All organizations that received PPP loans in excess of $2 million will be subject to audit by the SBA. Even those who received smaller loans might still be subject to audit.

As part of its audit, the SBA may request from the borrower documentation to support the borrower’s eligibility for the loan as well as its eligibility for forgiveness. Consequently, organizations should verify that adequate documentation has been prepared and retained to support the receipt and forgiveness of PPP loans, including (but not limited to):

  • A copy of the PPP loan application, including calculations and support for employee headcount and employee compensation
  • A copy of the loan forgiveness application, including all worksheets, calculations, and support for all figures
  • Documentation supporting the organization’s need for the loan, including relevant emails and memos
  • Payroll records
  • Financial statements
  • All correspondence with the PPP lender
  • If applicable, the organization's completed loan necessity questionnaire form

5. Avoid these common loan forgiveness application pitfalls. Some of the common errors we have observed organizations make as they prepare their loan forgiveness application include the following:

  • Failing to apply the $100,000 salary limitation cap on employees with annualized salaries in excess of $100,000
  • Including payments to independent contractors in their calculation of payroll costs eligible for reimbursement
  • Calculating average full-time employees (FTEs) at a company-wide (versus at an employee-by-employee) level
  • Inappropriately using the FTE reduction safe harbors

PPP reporting considerations in 2021

1. Prepare documentation up front – don’t wait until later. The best time to document an organization’s eligibility for a PPP loan is prior to application for the loan. This timing is especially true for second-draw loan applications, which require certain organizations to provide information upfront regarding their eligibility (for example, that they meet the 25% reduction in gross receipts test). While this might seem to fall in the category of common sense, many organizations that received PPP funds in 2020 found themselves scrambling on the back end to prepare such documentation.

2. Determine the optimal covered period for the loan. Thanks to recent regulatory changes, PPP loans now have more flexible covered periods – organizations can choose a period somewhere between eight and 24 weeks. In determining which covered period to use, organizations should balance the requirement to retain documentation about activities that occur during the covered period with the amount of time that might be needed to most easily support full forgiveness of the loan balance.

3. Be aware of future business changes. Prior to applying for a first- or second-draw PPP loan, organizations should look ahead to potential scenarios (such as M&A activity) during the loan period that might affect forgiveness or an organization’s ability to close an acquisition). For example, under current regulations, an organization that acquires another organization that has received PPP funds might need approval from the SBA prior to consummation of the acquisition or repay the PPP funds.

4. Review eligibility for the employee retention credit (ERC). In late 2020, updated stimulus legislation expanded eligibility for certain payroll tax credits, including the employee retention credit, to include organizations that received a PPP loan. Organizations should better understand what, if any benefit, such credits might provide to an entity’s cash flow situation.

5. Stay updated on potential PPP program changes. Organizations should develop a process to monitor changes to the PPP and other government assistance programs. They also can regularly check the Crowe PPP insights page and the financial reporting for government assistance page.

Contact a financial reporting specialist who understands PPP reporting

Andrea-Meinardi-225
Andrea M. Meinardi
Partner
Sean Prince
Sean C. Prince
Partner