We have received many questions from our auto dealership clients on when loan forgiveness on PPP Loans should be recognized and how loan balances and related forgiveness should be recorded in the year-end GAAP basis financial statements. Interestingly enough, there are no specific US GAAP standards for recording government assistance received by for profit businesses. That being said there are international accounting standards that address this and there are US GAAP standards that deal with how to record debt.
Accounting Standards Codification 105, Generally Accepted Accounting Principles, states that if the guidance for a transaction or event is not specified within a source of authoritative GAAP, an entity shall first consider accounting principles for similar transactions or events within a source of authoritative GAAP for that entity and then consider no authoritative guidance from other sources. Essentially this opens the door to allow a borrower to elect recording of the transaction in line with rules for recording debt under US GAAP, or to record as a grant in line with international standards (as there are currently no US GAAP standards that address this on for profit entities).
Key points under each method are as follows:
Debt Treatment FASB ASC 470 guidance on accounting for debt:
- Debt should initially recorded on the balance sheet at the full value of the loan
- The debt cannot be removed from the financial statements until the entity is legally released from the debt by either paying the debt or confirmation of forgiveness of the debt from the SBA
- Forgiveness would be recorded as other income once confirmed forgiven by SBA and would be presented as a non-cash financing activity on the statement of cash flows
Grant Treatment IAS 20 accounting for government grants and disclosure of government assistance:
- First, the one needs to consider whether or not they will qualify for forgiveness and how likely they are to receive forgiveness. They entity should consider how much of the loan is “probable” (75%-80% likely to occur) to be forgiven.
- A deferred income liability would be recorded when the company has received the loan and has determined they are eligible for forgiveness.
- No interest would be accrued due to the loan being expected to be forgiven.
- Deferred income is then recognized as the qualified expenses are recognized and is recorded as other income
- Grant proceeds will be presented within the operating section on the statement of cash flows as it is being used for operating costs
- Any remainder of the loan that is not expected to be forgiven should be presented as debt in accordance with ASC 470
There have literally been millions of PPP Loans that have been issued to small businesses. One of the first questions a financial statement reader will have is how have these loans and forgiveness been recorded. As such, clear concise disclosures of the accounting policies in the notes to the financial statements will be key to help avoid confusion and help a reader fully understand the impact on the income statement, cash flows and balance sheet.
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