Receipts sitting next to a calculator

As the year draws to a close, your thoughts might turn to preparing your financial statements. If you’ve received a Paycheck Protection Program (PPP) loan, however, you might wonder how to account for it. While it’s technically a loan, the forgiveness aspect means the funding could also be considered a grant.

This is familiar territory for nonprofits but an unusual situation for non-government, for-profit entities. And U.S. generally accepted accounting procedures (GAAP) don’t cite any specific guidance for businesses.

The Association of International Certified Public Accountants (AICPA) has released some announcements on this matter, including a technical Q&A (TQA 3200) issued in June. Financial Accounting Standards Board (FASB ) and International Accounting Standard (IAS) have also released guidance.

That said, the best option for you depends on your particular situation. Here are the basics.

Option 1: Treat the Loan as Debt

This will likely be the choice of most businesses that took out PPP loans from the U.S. Small Business Association (SBA). If your business hasn’t yet received PPP loan forgiveness approval, it’s probably an easier option. Between the 60-day approval window for banks and the subsequent 90-day period for SBA, forgiveness before the end of the year becomes less likely with each passing day.

When you treat your PPP loan as debt, it’s recognized as a financial liability (with interest accrued) on your balance sheet. The amount received from the SBA should be shown as a cash inflow from financing activities.

While this seems straightforward enough, treating your loan as debt introduces a potential new issue—debt covenant violations. If you have other loans that require you to maintain a certain debt to equity ratio, your ratio will change when you classify your PPP loan as debt. This could result in noncompliance with your debt covenants. Talk to your current lenders to make sure this option will work for you if you choose it.

Option 2: Treat the Loan as a Government Grant

US GAAP does not have specific guidance on accounting for government grants made to business entities if the grants are not in the form of a tax credit. However, as noted in AICPA TQA 3200.18, you can elect to account for a PPP loan as a government grant by applying the guidance in IAS 20 (which outlines a model for the accounting for different forms of government assistance, including forgivable loans). To do this, you must be likely to meet both the eligibility criteria for a PPP loan and the loan forgiveness criteria for all (or substantially all) of the PPP loan. If you can’t support that these conditions will be met, you should account for the loan as debt.

Once there is reasonable assurance that these conditions will be met, you can account for the PPP loan as an income-related grant and record the cash inflow from the loan as deferred income liability. You should then reduce the loan through earnings in the periods over which you recognize the expenses that the grant is intended to offset. The earnings can be presented as either a credit in the income statement (either separately as “other income”) or as a reduction of the related expenses.

For loans over $2 million, we strongly caution against using the grant model as the SBA has indicated they will audit loans over that amount. Also, if you are considering accounting for your loan as a government grant, make sure you continue monitoring developments from the SBA regarding loan forgiveness criteria to ensure you continue to meet these requirements.

Deciding whether to recognize your PPP loan as debt or a government grant is a complex undertaking. Since so much depends on your unique financial picture, there’s no one-size-fits-all answer to the question. We strongly recommend you speak with a CPA well versed in assurance services to determine the best solution for your company.

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