PPP loan accounting FAQs

9/22/2020
PPP loan accounting FAQs

Accounting for PPP loans can be complex, especially if you expect the loan to be forgiven. Crowe can help you gain clarity.

Determining the proper accounting treatment for PPP loans can be confusing, especially when the loan recipient expects the loan to be forgiven and wants to account for the arrangement as an in-substance grant. To help you better understand some of the accounting issues, we answer five common questions about PPP loan accounting.

Can I account for a PPP loan as an in-substance grant? 

A PPP loan is, in form, a forgivable loan. If you meet the conditions for forgiveness, the lender and Small Business Administration (SBA) forgive the loan balance and accrued interest; you have no obligation to pay it back. However, if the conditions for forgiveness are not met, you must pay back all or a portion of the loan balance, including accrued interest, over the loan term.

Because a PPP loan is a legal form of debt, it’s always acceptable to account for a PPP loan as a loan under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topics 470 and 405.1

However, if after considering all relevant facts and circumstances you determine that forgiveness is probable, it is also acceptable to account for a PPP loan as an in-substance grant. For this to happen, you must both be eligible for the PPP loan and expect to meet the terms for forgiveness (for example, the funds will be spent on qualifying expenses, and you maintain required salary and employment levels). 

Given the lack of explicit guidance on how to account for in-substance government grants under U.S. GAAP, a for-profit entity will need to elect an accounting policy for its loan, which might include ASC Topic 958-605 or IAS 20.2  A not-for-profit entity that elects to account for a PPP loan as an in-substance grant would apply ASC Topic 958-605 to its loan.

I’ve heard that the SBA has the ability to review PPP loan eligibility even after a loan is forgiven. Does the risk of an SBA audit raise concerns about accounting for a PPP loan as an in-substance grant?

Per the terms of the PPP loan program, the SBA can review your eligibility for a PPP loan, including your need for the loan, both before and after forgiveness is granted. This fact, in conjunction with uncertainty about how the SBA will interpret the “necessity” requirement of the loan program, could raise doubts about whether you can comfortably conclude you were eligible for the loan and if it is probable your PPP loan will be forgiven (for example, because you did not, in retrospect, need the PPP loan).

The terms of the PPP loan program, including the eligibility requirements, are a matter of legal interpretation; you should consult with legal counsel when assessing your eligibility for the PPP loan program. We also encourage you to document your assessment of eligibility, including the facts and circumstances considered by management and the views of legal counsel.

If, after consideration of your specific facts and circumstances, you are unable to conclude that it is probable your loan will be forgiven, you should account for the loan under ASC Topics 470 and 405.

If I expect to receive partial forgiveness, can I account for a portion of the loan as an in-substance grant and the remaining portion as a loan?

While this “unit of account” question is not explicitly addressed in the accounting guidance, we believe it may be acceptable to account for the portion of a PPP loan you expect to be forgiven as a grant and the remainder as a loan. However, given the lack of explicit guidance, we encourage you to first discuss this approach with your auditor or accounting adviser.

I initially accounted for my PPP loan as a loan. If I expect the loan to be forgiven, can I switch my accounting policy and account for it as an in-substance grant?

Under U.S. GAAP, an accounting policy – once elected – should be applied consistently from one period to another. A change to an accounting policy should occur only if one of the conditions addressed in ASC Topic 2503 is met. If you wish to change your PPP loan accounting policy (for example, from loan to grant accounting), you will first need to review the guidance in ASC Topic 250 on changes in accounting policy to assess eligibility. We also suggest you discuss the matter with your auditor or accounting adviser.

Is the FASB planning to issue explicit guidance on accounting for government assistance?

As of the date of this publication, the FASB does not have an active standard-setting project on its agenda related to the accounting for PPP loans and other forms of government assistance. While the FASB staff continues to evaluate interpretive questions outside the PPP loan program,4  we do not expect the FASB to issue guidance on the accounting for government assistance in the near term.

In the meantime, you might consider the nonauthoritative guidance in Technical Questions and Answers 3200.18, "Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program," issued by the AICPA in June 2020.

Figuring out accounting for PPP loans

Crowe accounting professionals have a deep understanding of multiple government assistance programs, including PPP loans. We can help you think through your options, develop and implement policies and procedures that can stand up to an audit, and prepare required disclosures for your financial statements.

Need help understanding PPP loan accounting requirements? 

Crowe can provide some clarity and answer your questions on PPP loan accounting.

1 See ASC Topic 470, “Debt,” and ASC Topic 405-20, “Liabilities – Extinguishments of Liabilities.”
2 See ASC Topic 958-605, “Not-for-Profit Entities – Revenue Recognition" and International Accounting Standard 20, "Accounting for Government Grants and Disclosure of Government Assistance.”
3 See ASC Topic 250, “Accounting Changes and Error Corrections.”
4 See the meeting minutes for the FASB’s May 20, 2020, board meeting.

Contact us to learn more about the accounting for PPP loans.

Sean Prince
Sean C. Prince
Partner
Julie Ward
Julie Ward
Partner