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Accounting for SBA Loans Under the CARES Act’s PPP

by Adam Olsen - May 2020 7 min read

We’ve all heard quite a bit about the SBA loans under the Paycheck Protection Program (PPP) within the CARES Act. And while it’s tempting to interject a certain op-ed flavor to these musings given the storm surrounding the PPP, we know that there’s plenty of that elsewhere. Instead, we want to focus on something far more practical and useful – how are you supposed to account for these darn things in your financials?

Therefore, to build on our previous insights on this controversial and highly scrutinized program, we now want to zoom in on what these loans mean for your books. Just remember, this is an extremely fluid situation so things could change. However, we thought it best to get the ol’ ball rolling so you can start thinking about the accounting considerations involved.

 

But First, Some Bad News

While it's true that the SBA began releasing another $320 billion in new forgivable loans under the PPP on April 27 – that's in addition to the $349 billion authorized in late March – most banks and officials don't expect the additional funds to last even a week. Unfortunately for new applicants, there were 1.7 million applications already in the pipeline before the second tranche of funding was even approved.

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But that's not to say that a third round of funding is an impossibility. However, whether another round comes to fruition or this second tranche is the end of the PPP funding for now, companies still need to know how to account for these loans, and they don't have a lot of time to figure it out.

 

Follow the GAAP Lead

At this time, there’s no new guidance under US GAAP delving into the specifics on accounting for forgivable loans under the PPP. However, while the FASB hasn’t said anything specifically about these loans, there’s certainly enough existing guidance to provide us a good idea on how to properly account for them.

That said, there’s no point in waiting for additional guidance that might not ever come. Plus, as every good accounting team knows, quarters have a way of passing by at light speed so, like it or not, you'll be staring into the face of your Q2 financial close in no time. And since preparation is critical for any close process, particularly ones with so many variables and uncertainties involved, we wanted to give you a head start and provide some key insights based on the existing standards.

 

Accounting for Your Forgivable Loan

If your company received a loan under the PPP, you should recognize the initial funds as debt under ASC 470 on your balance sheet. From there, you amortize any capitalized, incremental debt issuance costs generally over the life of the loan under the effective interest method. Incremental costs can include items like preparation costs and fees you paid to an advisor or accounting firm to help you with the application process.

Also, even though you're deferring interest and principal payments for six months, you should still accrue the interest at the stated rate on a monthly basis. Since, once again, there's no new guidance for these loans, this accrual method is the appropriate approach to take. Granted, while it is absolutely possible that this interest will be eligible for forgiveness under the PPP guidelines, the accounting should follow business-as-usual for the time being until your loan is considered extinguished – but more on that below.

 

Track Your PPP Funding Usage

Similarly, we absolutely recommend that you meticulously track every single dollar you spend from the PPP funding. It just makes sense to be as detailed and thorough with your recordkeeping as possible in preparation for a full audit.

CARES Act SBA Loans: How Accounting & Finance Can Prepare

Also, even if every single penny of your PPP funding goes towards qualifying expenses – payroll, rent, utilities, mortgage interest – you should account for these expenses in your financial statements in a manner that's consistent with the historical presentation. In other words, you should not recognize them as a reduction of the loan balance.

 

Extinguishment of Debt

Currently, under ASC 470-50, GAAP only considers a debt instrument extinguished if the borrower is legally released from the obligation or repays the creditor. Thus, applying that logic to a PPP loan – which, by the way, has all of the necessary components for GAAP to consider it a legally binding loan agreement – you would need to apply for loan forgiveness and then submit certain documentation that verifies your qualified expenses. Staying consistent with our point on meticulously tracking your expenses, it might be a good idea for you to create a new account or reconciliation and review the business process for the PPP funds.

Now, fast forwarding to when the PPP loan is forgiven, you would only derecognize the debt on your balance sheet upon formal forgiveness, as spelled out by the guidance in ASC 405-20-40-1. While it's true that we still have no idea what that formal forgiveness process might actually entail for these PPP loans, you can still get a general picture of what the process will look like. Just remember, you should not recognize an extinguishment until the extinguishing event has occurred. Based on the amount of the loan that's ultimately forgiven, this would result in a gain based on the difference between the reacquisition price – including any extinguishment costs – and the net carrying value of your PPP loan. In the case of forgiveness, the reacquisition price will most likely be $0. The calculation of the gain would also factor any accrued interest as well as deferred finance costs relating to the forgivable portion of the loan. In a case where a portion of the loan is not forgiven, then you would need to prorate these items.

From there, you would present the gain in your financial statements as a separate item. Where, exactly, in the financial statements should you present such debt extinguishment gains and losses? Well, that's a good question. In fact, that’s an area where guidance is not explicit. Some common ways of presenting them include:

  • As a separate line item on the income statement, or
  • Within interest income or expense on the income statement with additional disclosure on the specific gain or loss amount in the footnotes to the financial statements.

Since no clear guidance on presentation currently exists, this may be an area in the future where the FASB weighs in to help reduce diversity in reporting, especially with so many businesses participating in the PPP.

 

PPP as a Government Grant

Lastly, we understand that some companies may view their PPP loan obligation more akin to a government grant rather than a loan, at least when it's probable they'll meet all of the conditions for forgiveness. While there is no specific US GAAP that addresses the accounting for government grants to business entities, alternative approaches for companies taking this point of view include the application of IAS 20, ASC 450, or ASC 958 by analogy.
As a reminder, the FASB permits the use of non-US GAAP – IFRS, for instance –under circumstances where no authoritative guidance exists for similar transactions, as noted in ASC 105-10-05-2. If your company intends to account for its PPP loan as something other than debt, be sure to discuss your position with your external auditors and any other necessary stakeholders well in advance.

Need SBA loan application help? Let's talk.

As we said up top, this is a fluid situation so things could very well change. However, assuming we don’t see any sweeping new guidance from the FASB – which, as we said, is unlikely – these pointers are a very good place for your accounting team to start. But in the bigger picture, let’s just hope that everything goes smoothly from here on out, from this terrible COVID-19 crisis itself, to the countless things it’s affected. Either way, whether you’re a distressed company looking for a lifeline or just simply needing some advice, Embark will be here to steer your company toward higher ground.

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