New Jersey CPA - January/February 2021

Page 14

ACCOUNTING, AUDITING & ATTEST

3 Approaches for Reporting PPP Forgiveness on Financial Statements BY ROBERT J. TRAPHAGEN, CPA, TRAPHAGEN CPAS & WEALTH ADVISORS

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) created a new lending program, the Paycheck Protection Program (PPP), under Section 7 (a) of the Small Business Act (15 USC 636) to provide low-interest loans to certain small businesses. PPP loans are eligible for forgiveness if the requirements specified in the CARES Act regarding use of funds, employee retention and maintenance of salaries are met. The question becomes, during these unprecedented times: How is PPP loan forgiveness reported on financial statements? There is no specific standard to date from U.S. Generally Accepted Accounting Principles (GAAP) that addresses accounting for PPP loan forgiveness. However, the American Institute of CPAs (AICPA), working with its members and Financial Accounting Standards Board (FASB) staff, developed Technical Questions and Answers (TQA) 3200.18. The TQA addresses accounting for non-governmental entities including business entities and not-for-profit entities. The Securities and Exchange Commission also has weighed in by indicating that it would not object to accounting for PPP loans under ASC 470 or as a government grant, by analogy to IAS 20, a non-GAAP international standard. There are three approaches to consider: 1. FASB ASC 470-50/405-20 One approach is to recognize the loan forgiveness under FASB ASC 470-50, Debt Modifications and Extinguishments, and FASB ASC 405-20, Extinguishment of Liabilities. Whether an entity expects to repay the PPP loan or believes it represents, in substance, a grant that is expected to be forgiven, it should account for the loan as a financial liability, a single line item within the short- and/or long-term section of the balance sheet. Interest begins accruing at origination in accordance with FASB ASC 835; interest

12

associated with forgiven principal will be included in the forgiveness. Based on the guidance in FASB ASC 405-20-40-1, for purposes of derecognition of the liability, the proceeds from the loan would remain as a liability until either (1) the loan is, in part or wholly, forgiven and the debtor has been “legally released” or (2) the debtor pays off the loan to the creditor. 2. FASB ASC 958-605 A second approach is to follow the guidance in FASB ASC 958-605, Not-for-profit (NFP) Entities — Revenue Recognition. Governmental assistance in the form of loan forgiveness would be considered a nonreciprocal or non-exchange transaction referred to in the guidance as a contribution. Because PPP loan forgiveness is dependent on meeting certain conditions, it would be considered a conditional contribution. Conditional contributions are recognized as income when the conditions on which they depend are met. Under this approach, the cash inflow from the PPP loan is recorded as a refundable advance. One should reduce the refundable advance and recognize the contribution as income once the conditions for release have been met. Additional guidance suggests that a non-governmental NFP may also account for the PPP loan as a conditional grant if certain conditions are met. 3. IAS 20 Another approach is to follow International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosures of Government Assistance. Under this guidance, entities’ forgivable loans are recognized as government grants. Forgivable loans are “loans which the lender undertakes to waive repayment under certain prescribed conditions.” This approach may be used if the entity has “reasonable assurance” that the loan

NOVEMBER/DECEMBER 2020 | NEW JERSEY CPA

will be forgiven. Reasonable assurance in International Financial Reporting Standards (IFRS) is similar to the “probable” threshold in U.S. GAAP. The cash inflow from the PPP loan is recorded as deferred income; income is recognized, and the liability is reduced on a systematic basis as the eligible expenses are paid. The caution here is that the forgiveness estimate and the actual results could differ upon final settlement, especially where the grant period may cross year end. There is no clear consensus; it is a matter of substance versus form. Two highly regarded professionals — Brad Muniz, CPA, CGMA, partner at SobelCo, and Frank R. Boutillette, CPA, CGMA, partner at Withum — while differing on their approaches, both agreed that the critical element of PPP reporting will be footnote disclosures that clearly identify the impact to the financial statements. Disclosures would include the accounting method used to record the loan, loan repayment terms, related interest, presentation of forgiveness related expenses and lastly any subsequent event disclosures. Robert J. Traphagen, CPA, CGMA, is the managing partner of Traphagen CPAs & Wealth Advisors. He is a past president of the NJCPA and is a member of the Accounting & Auditing Standards Interest Group. He can be reached at robert@tfgllc.com. READ MORE CARES ACT ARTICLES AND RESOURCES njcpa.org/topics/caresact

DO MORE JOIN THE ACCOUNTING & AUDITING STANDARDS INTEREST GROUP njcpa.org/groups