Accounting for PPP Loan Forgiveness Cerini & Associates, LLP We anticipate that disclosure of PPP credit review risks in documents filed with the SEC by public companies will continue for the foreseeable future, and certainly at least until the review process, timing, and scope of the SBA becomes clearer. For more information on borrower accounting for PPP loans as well as the overall impact of COVID-19 on estimates of credit losses, see NDS 2020-04, COVID-19: Accounting and financial reporting considerations., Partner Download our 2021 financial reporting playbook for more accounting guidance and strategies for successful reporting on government assistance programs. We offer tailored solutions whether private company or owner; public or private fund, adviser or fund service provider; or Fortune 1000 enterprise. Our advisors are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed on ourCOVID-19 Resource Center. (31). Below is an example of disclosing a PPP loan: 1. In the quarterly and annual accounts, Note 11 is the appropriate place to disclose a PPP loan. How to Ensure Proper Accounting for PPP Funding and Loan Further consideration needs to be given to the accounting for these loans when an entity uses a different basis of accounting. PPP Loans and Financial Statements: What You Need to Know (9). Generally Accepted Accounting Principles (GAAP) that deal with accounting for the forgiveness of PPP loans. Which one you choose will depend on the type of company, whether you intend to repay the loan and other specific goals. The PPP loan should be presented on the(6), Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES(7), Loan Forgiveness: The debt is carried on the balance sheet until the entity has been legally released as primary obligor, or in other(8), PPP loans should be accounted for as debt instruments in accordance with ASC 470, Debt. Total compensation is capped at $100,000 per year for any person, and does not include payroll taxes imposed on the employer or withheld from the employee, plus: PPP loan recipients must certify, in good faith, that the loan was required to continue operations due to the current economic circumstances and acknowledge that the funds have been used to retain workers and maintain payroll or make business interest, rental or lease and utility payments, and that the applicant does not have other covered loan applications pending for similar or duplicative purposes. 3. Because PPP loan forgiveness is dependent on meeting certain conditions, it would be considered a conditional contribution. PPP Loan Insights: Forgiveness Does Not Mean Forgotten Allison Henry. Thanks to recent regulatory changes, PPP loans now have more flexible coverage periods organizations can choose a period between eight and 24 weeks. Once forgiven the loan proceeds will be recognized through the income statement as a non-operating gain. However, generally, most businesses will account for PPP loans as either debt or government grants. Digs with Dignity is on a mission to provide those transitioning from homelessness with custom, fully furnished living spaces that feel like home. The information should include the date of issue, nominal amount, book value, description of the loan, interest rate, interest paid and maturities. Alternative Accounting Treatment for PPP Loan Proceeds. Some of the most common mistakes observed by organizations in preparing their loan forgiveness application are: However, even borrowers of publicly traded PPPs who have been fortunate enough to grant their loans have yet to decide how to revise their disclosures to address the ongoing conditional legal liability. GTIL refers to Grant Thornton International Ltd (GTIL). In particular, given that the timing, scope, nature and scope of these audits are currently unknown, the probability and potential amount are extremely difficult to estimate. A nongovernmental entity may account for a Paycheck Protection Program (PPP) loan as a financial liability in accordance with FASB ASC Topic 470, Debt, or under other models, if certain conditions are met, according to new guidance for borrowers issued Wednesday by the AICPA. Since our entity has not received forgiveness of the PPP loan prior to(23), Disclosure. So far, there is no specific U.S. standard. Many PPP borrowers are in different stageswith their loans. Disclosure Under Either Model: NFPs with material PPP loans should adequately disclose their accounting policy for such loans and the related impact to their financial statements. agreed that the critical element of PPP reporting will be footnote disclosures that clearly identify the impact to the financial statements. According to the TQA, non-governmental entities may account for PPP loans under FASB ASC Topic, 470, Debt, or as a government grant under FASB ASC Topic 958-605, Not-for-Profit Entities, when certain circumstances are met. Financial Statement Disclosure for Ppp Loan, LETM Receive insights from our specialists in a variety of areas and timely information on upcoming events directly to your inbox as they go live in our online Knowledge Center. Organizations should develop a process to monitor changes to the PPP and other government assistance programs. (2). Any gain recognized as a result of amounts of principal and interest forgiven is shown as a noncash reconciling item to net income in the cash flows from operations. Such people are not liable or responsible for any perceived endorsement of, or experience with, services provided by Spiegel Accountancy Corp. Under this option, entities record the loan as a liability on the balance sheet and interest is recorded as it would be with any other financing arrangement. Accounting for PPP Loans: Guidance for Not-for-Profits Moss Organizations should develop a process to monitor changes to the PPP and other government assistance programs. USA Cares, Inc. (16). Below is an example of disclosing a PPP loan: 1. Statements of fact and opinion are the authors responsibility alone and do not imply an opinion on the part of PICPA officers or members. Grant (ASC Topic 958-605) if an enterprise expects to meet the forgiveness eligibility requirements and concludes that it can be forgiven, in substance, then PPP loan can be treated as grant. The best time to document an organization`s eligibility for a PPP loan is before applying for the loan. While there isnt specific guidance under U.S. GAAP on how to account for this type of loan, there is some flexibility. Prepare documentation up front dont wait until later. Future scrutiny of the good faith certification will depend on additional guidance issued by the SBA. (14). Its important to note that material PPP loans should adequately disclose all key terms of the loan in the notes to the financial statements. She can be reached at ncradic@troutcpa.com. A group of House members led by Rep. Chrissy Houlahan sent an ICBA-supported letter to the Small Business Administration calling for common-sense reform to Paycheck Protection Program loan forgiveness. No: 124 Sapanca / SAKARYA . Borrowers are not required to impute a market rate of interest to government-guaranteed obligations, such as PPP loans, under the guidance in ASC 835-30, Imputation of Interest. If required, the repayment of PPP funds is treated as a cash outflow from financing activities. St. Louis, MO 63101-2501. Regardless of the accounting approach followed by a borrower, if the PPP loan is material to the financial statements, the borrower should disclose in the footnotes how the PPP loan was accounted for and where the related amounts are presented in the financial statements, including the statement of cash flows. How should that be booked? Your comment must be approved first, You've already submitted a review for this item, You typed the code incorrectly. A custom solution allowing banks and their customers to calculate SBA PPP loan amounts based on unique business characteristics. You have 10 months to file for forgiveness from the end of your covered period. Under the guidance in ASC 105, Generally Accepted Accounting Principles, an entity may apply nonauthoritative guidance by analogy when guidance for a transaction is not specified within U.S. GAAP. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in the bulletin. Borrowers that present a classified balance sheet should determine the appropriate classification of a PPP loan according to the classification guidance in ASC 210-10-45 (with those entities accounting for PPP loans under ASC 470 also considering the guidance in ASC 470-10-45) based on the loans contractual terms. Additionally, subsequent to the passage of the CARES Act, the IRS clarified in Notice 2020-32 that (i) no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of the PPP loan, and that (ii) the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act. With the volume of businesses who have received PPP loans over the last few years there has been an explosion of inquires asking the CPEA for guidance on how to record these loans in the accounting records. If borrower have nontaxable forgiveness loan amount and nondeductible expenses in the same period for tax purposes, there is no impact on the tax provision. 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Disclosures from PPP borrowers whose PPP loans have not yet been issued should be updated in their regular SEC filings to reflect the current state of their credit forgiveness process, e.B. Debt Model (FASB ASC 470) In this model, a PPP loan is accounted for like any other liability (including interest accrual) until the forgiveness process is(16), What Disclosure Should Be Included in the Financial Statements for Loan Forgiveness? If the borrower cannot support that it will probably meet both the eligibility and the forgiveness criteria, the PPP loan should be accounted for as debt. 15. Currently, there are no specific guidelines in U.S. generally accepted accounting principles (GAAP) that deal with accounting by a company that receives a forgivable loan from a government agency. U.S. GAAP Accounting and Reporting Considerations for PPP Despite widespread awareness of the program, questions remain. Matt Tierney and Andre Bourgon from Grant Thornton discuss how to execute a winning ecosystem strategy to manage insurance companies. This new legislation contained the stipulation that if a minimum of 60% is not used for payroll costs, no amount of the loan can be forgiven. The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the US economy, including $349 billion that was earmarked for the Paycheck Protection Program (PPP) to be administered by the U.S. Small Business Administration (SBA). It should be noted that a borrower should not record income from the repayment of his debts until the borrower has been legally discharged as the principal debtor under the loan. However, a borrower that does not account for its PPP loan as debt (for instance, if the borrower applies IAS 20 by analogy) is likely to recognize additional deferred taxes in accordance with ASC 740. Once the application for loan forgiveness is submitted, it could take 60 days for the lender to review and 90 days for the SBA to review prior to formal receipt of forgiveness. Browse our thought leadership, events and news for insights and a point of view on business-critical topics. While U.S. GAAP does not provide specific guidance for PPP loans, there are a couple of options available for reporting the PPP loan on financial statements. In particular, issuers must continue to disclose the risk that their PPP loan may be audited by the SBA for a maximum period of six years from the date of delivery or repayment, including an examination of the borrower`s economic certificate of necessity. The PPP was closed to additional small business applicants on Aug. 8, 2020. (30). Under ASC 230, Statement of Cash Flows, the amount borrowed under a PPP loan is shown as a cash inflow from financing activities, principal repayments as cash outflows from financing activities, and interest payments as outflows from operating activities. The information contained in herein does not constitute accounting, legal, or professional advice. 2300 Contra Costa Blvd., Suite 425 Pleasant Hill, CA 94523. (32). However, many businesses do not have an established policy for accounting for government grants or might conclude that PPP loans are not similar to the government grants received in the past, so they will need to establish a new accounting policy. Energy companies can get ahead with fiscal discipline, ESG disclosure preparation and attention to cybersecurity, 2022 Energy Symposium speakers say. To assert the necessity of a PPP loan, as noted in Questions 31 and 37 of the SBAs PPP FAQs, an entity must take into account its ability to access other sources of liquidity sufficient to support its ongoing operations in a manner that is not significantly detrimental to its business. Find out how the technology, banking and asset management sectors are adapting their strategies to handle todays threats. However, there may be diversity in practice regarding how entities treat contractual interest on PPP loans for income tax purposes. The final section of the whitepaper provides some additional things to consider when accounting for the PPP loans. (34). Find out how to manage the business risks behind data. If you are an insurance company that has qualified and received a PPP loan under the CARES Act, you may be wondering how to incorporate PPP loan income and any remittance information into your quarterly and annual regulatory returns. Determine the optimal coverage period for the loan. A. Forgiveness income can be recognized more quickly by using the grant approach as compared to recording the loan as a financial liability. Through this approach, for-profit entities would analogize the accounting treatment with the not-for-profit U.S. GAAP guidance for contributions. 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. Alternatively, the borrower may choose to consider the loan as a government grant and amortize the funds as they are used and there is a reasonable possibility of the loan being forgiven. Any book-to-tax differences should be accounted for as a temporary difference in the financial statements and should then be reversed when the forgiveness of the accrued interest is recorded in the financial statements. Even those who received smaller loans might still be subject to audit. No matter where they are in the process, organizations should maintain quality reporting for their PPP loans their forgiveness might depend on it. Businesses, including mortgage bankers, must meet certain eligibility requirements to receive PPP loans and are required to meet PPP guidelines to receive loan forgiveness. How to solve business problems and mitigate the risks, Make your transformation deliver on its promise. Now is the time to be working closely with your advisors to understand your options. Our industry experience means you can find professionals who speak your language and bring earned insights to the table. Be aware of future business changes. Companies must focus on attracting and retaining talent, modernizing HR to serve new business needs while becoming more efficient. Thank you for your article. However, loan proceeds from financing activities may also be acceptable. Each borrower under the PPP program should carefully analyze its unique facts and circumstances in determining the appropriate accounting. (36). Joint Letter: The letter calls on the SBA to forgive PPP loans in which the loan amounts were miscalculated due to good-faith errors. Contributions, as defined, can include the cancellation of liabilities. Prepare thorough disclosures. (21). If debt(26), We have audited the accompanying financial statements of USA Cares, Inc. (a nonprofit evidence regarding the amounts and disclosures in the financial. Therefore, it is vital to maintain detailed documentation of the initially submitted eligibility criteria, submitted by management, as well as detailed PPP loan expenditure documentation to support payroll expenses and other eligible expenses used for loan forgiveness. In this case, Company X can elect to treat the PPP loan as grant, recognizing the gain on the income statement. Considerations: If this accounting treatment is elected, the business entity will have to continually assess whether it continues to meet the eligibility criteria. The amount of loan forgiveness may be reduced if the borrower terminates employees or reduces salaries during the covered period. Borrowers of publicly traded PPPs who have chosen not to apply for a pardon must disclose this fact and the reasons for this decision on their next Form 10-Q or 10-K, and possibly earlier on a Form 8-K. 5. On the quarterly and annual statements, Note 11 is the appropriate place to disclose a PPP loan. The loan is subject to a note dated {Date of Note} and may be forgiven to the extent proceeds of the loan are used for eligible expenditures such as payroll and other expenses described in the CARES Act. There are many questions surrounding the PPP and its accounting and tax consequences. Meet with your advisors now, if you havent started already, to discuss your options and strategy. Just like everything else regarding the COVID-19, nothing is simple. (17). Loan forgiveness is reflected in capital gains in the accompanying statement of income. A borrower applying IAS 20 by analogy should not present the income statement impact of any PPP loan forgiveness as revenue. Contact a financial reporting specialist who understands PPP reporting. Within U.S. GAAP, there is no specific guidance on accounting for government loans or grants in the for-profit arena. The SBA has also stated that it will provide further guidance and clarification regarding acceptable PPP expenditures. The receipt of PPP funds is treated as either a cash inflow from operating activities or a cash inflow from financing activities. 15. According to the SBAs rule regarding lender and SBA responsibilities, a borrower, in order to receive forgiveness on a PPP loan, must submit an application for forgiveness to the creditor. PPP Loan Forgiveness for Borrowers International China Practice India Practice Latin America Practice Consulting Technology Risk & IT Compliance Strategy & Operations Transactions Specialty Technology Automation Data Analytics & BI Development & Integration Enterprise Systems Technology Products Technology Strategy Automation 2) The taxpayer's name, address, and EIN/SSN. Accounting for PPP loans: Is it a loan or a grant? You have also muddled owing to forgiveness programs. You can outsource cybersecurity, but you can't outsource your risks. Since the loan can only be written off from its balance sheet (i) when the loan is paid or (ii) when the entity is legally released from the liability, the Company Xs 2020 balance sheet would include a loan of $700,000. Loan forgiveness is attractive to borrowers of the PPP loan, and people today are still eligible. AICPA issued Technical Question and Answer (TQA) 3200.18 (the TQC) in accordance with US GAAP which addresses non-governmental accounting for forgivable loans received under the PPP. There is less specific on guidance on this method than ASC 470, and it is generally not preferred. For income statement purposes, any PPP forgiveness would be considered gain on extinguishment of debt. PPP borrowers are in various stages of reporting on PPP loans and applying for loan forgiveness. Therefore, when the loan proceeds are received, the(9), Administrations (SBAs) consolidated financial statements for fiscal years 2021 Guarantees, and (D) Forgiveness of PPP Loan Guarantees. Private company boards should bring the backgrounds and insights to understand risks and opportunities and drive the business forward. When the debt is extinguished, any amount that is forgiven (including accrued but unpaid interest) is recognized in the income statement as a gain upon debt extinguishment. The selection of one over the other is dependent on the likelihood of ultimate loan forgiveness. (13). Businesses have seen a spike in governmental assistance in the last few years mainly due to the COVID-19 pandemic. There are no specific disclosure requirements for PPP loans that(12), Would initially record the cash inflow from the PPP loan as a financial liability and would accrue interest in accordance with the interest(13), Note: If the Council interprets the PPP loan to be forgivable debt (and not a refundable grant/conditional contribution), then modify the above disclosure(14), The chances are that you have already finalized your 2020 financial statements. As discussed in TQA 3200.18, IAS 20 is not the only source of nonauthoritative guidance that a borrower may use by analogy to account for government grants. For ITB financial statements, you would still include those nondeductible expenses. How we work matters as much as what we do. Some of the common errors we have observed organizations make as they prepare their loan forgiveness application include the following: 1. However, if borrower uses the proceeds for qualifying expenses which are not deductible in 2020 and receive forgiveness which are excludable from income in 2021, then unfavorable tax treatment willhave occurred in 2020. (10), and through the date these consolidated financial statements were included in this PPP Loan proceeds are available to be used to pay for payroll costs,(11), Disclosures under the conditional contribution model are more straightforward. Actual results No decision has been made as to whether the company is entitled to a pardon in whole or in part. This isnt the tech you know. Read 4 Options to Account for Your Companys PPP Loan for more detail on these methods. Independent Auditors Report for the United States Small PPP Financial Reporting | Williams-Keepers LLC Regardless of the financial accounting classification, PPP loans are treated as debt for federal income tax purposes. Spiegel Accountancy Corp. is not responsible for, nor makes representations about, the accuracy of the information contained on these parties websites. Gain on forgiveness of PPP loan : 722,577 - 722,577 - . The income statement impact of any loan forgiveness under IAS 20 may either be presented separately or be offset against the related expenses. However, these loans are eligible for forgiveness (in full or in part, including any accrued interest) under certain conditions. Manufacturing Audit Leader, Office Managing Partner, Nashville, financial reporting for government assistance page. Grant Thornton LLP is a member firm of GTIL. Subscribe and receive the information that matters to you. Has anyone considered the accounting for fee recognition and reporting on the Bank side? statement presentation, disclosures to be included in the financial statements, and sample wording to be included in the management representation letter. The two requirements for the full loan forgiveness were that the full-time staff . For professional advice, please engage or consult a qualified professional. In any of these circumstances, many organizations continue to struggle with PPP-related technical accounting questions. PPP loans are to be accounted for as debt under CSA 470, Debt. Learn how we can help you. COMMITTEE +90 (532) 558 77 89 | Fear not, JLKR provides the advance answer to that question in this post. The Revenue Procedure also requires ALL taxpayers to attach a disclosure statement to the tax return for the year the PPP loan forgiveness is being reported as income (even though nontaxable). The first entry will be to record the forgiveness of the interest amount and the second entry will be to record a loan modification. This publication has been modified in part to reflect certain provisions of the Consolidated Appropriations Act, 2021. Accounting for the PPP loan and related forgiveness The The SBA may request repayment if it is determined required expenditure guidelines were not met and more importantly, the business entity did not actually qualify for a PPP loan. Thought leadership, events and news for insights and a point of on. Or consult a qualified professional the whitepaper provides some additional things to consider when for... Costa Blvd., Suite 425 Pleasant Hill, CA 94523 of income events and news for and... To be accounted for as debt under CSA 470, and people today are still.... Borrower under the PPP loans: is it a loan modification Bank side the letter calls on quarterly. Separately or be offset against the related expenses letter: the letter on. 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