Part 15 – The CARES Act – A Debt or A Grant?

Debt or a Government Grant?

The SBA’s PPP loan program is concluding, and the linchpin was the opportunity for full or partial forgiveness if the proceeds were used for payroll and other eligible expenses. The primary terms of the PPP loan provide for a 1% fixed rate loan payable ratably over a 2-year period.

We believe that a company’s expectation for loan forgiveness can provide for alternatives in the accounting for the PPP loan.

It is always appropriate to follow Accounting Standards Codification (ASC) 470, “Debt”. Under ASC 470 a company would record and recognize a liability for the PPP loan and accrue interest under its terms as long as the loan is outstanding. Imputed interest is not required since the loan is under a government program.

Because of the unique aspects to the SBA’s PPP loan program and the intention of meeting the eligibility and loan forgiveness criteria, a company may elect to account for the loan in a manner similar to a government grant whereby as the company complies with the loan forgiveness criteria, income is earned. We can only analogize to some international GAAP since there is no specific guidance in US GAAP. Under International Accounting Standards 20, “Accounting for Governments Grants and Disclosure of Government Assistance”, there is an accounting framework for accounting for government grants.

·    If the company elects to follow ASC 470 and is relieved of repayment of the loan in full or part, the accounting is covered by Subtopic ASC 405-20, “Liabilities – Extinguishment of Liabilities” and would be recognized in the statement of operations as a gain on loan extinguishment. In the cash flow statement, the debt proceeds would be shown as a financing activity and the forgiven amounts be disclosed as a non-cash financing activity.

·    If the company elects to follow the accounting for a government grant, the loan forgiveness would be shown under a separate or general heading as other income or a reduction of the related expense in the statement of operations. In the cash flow statement, the loan proceeds would be shown as an operating activity or as a financing activity.

In conclusion, a company that expects to meet the PPP loan forgiveness criteria should account for the PPP loan as debt or a government grant.

Please contact your BKM Sowan Horan team member if you need further assistance on this important matter.