COVID-19 PPP Accounting and Reporting Guidance
A key component of the Coronavirus Aid, Relief, and Economic Security (CARES) Act is the Payroll Protection Program (PPP). The PPP’s primary goal is employment stabilization. For businesses trying to access the PPP to pay employees during this uncertain time, taking steps to properly account for the PPP funds is vital. While prior Herbein blogs have focused on maximizing forgiveness of the loan proceeds of this program, it is important for business owners to account for these loans on a GAAP basis within general ledger and financial statements.
Currently, there is no formal U.S GAAP guidance offering assistance on how to account for a forgivable loan from a government entity – but we do anticipate it is forthcoming. Right now, it is recommended that all PPP proceeds are classified as ordinary debt obtained and should be accounted for utilizing the following considerations:
- Proceeds from PPP should be recorded as cash received and debt incurred on your balance sheet at the time the loan is funded.
- Loan origination costs may be capitalized initially and amortized over the term of the corresponding debt.
- Interest should be accrued at the stated rate of 1% on a monthly basis. Note that interest and principal payments are deferred for six months and it is possible that this interest may be forgiven. However, there is no released guidance presently.
- The costs of qualified expenses specifically, payments for payroll, rent, utilities and interest should continue to be accounted for through earnings in accordance to policies already in place. These expenses are recognized costs in the income statement and do not serve as reductions of the PPP, nor are they reflected on the balance sheet during the 8-week forgivable measurement period.
- Businesses must formally apply for loan forgiveness and submit detailed documentation related to the existence and accuracy of qualified expenses. Under U.S. GAAP, debt is considered extinguished once the borrower is legally released from being the primary obligor. Thus, the PPP liability is derecognized from the balance sheet only upon formal forgiveness of the debt.
- The resulting gain on forgiveness is measured based on the net carrying value of the PPP loan, which includes accrued interest (if eligible) and loan origination costs relating to the forgivable portion of the loan.
- This gain is presented as a separate line item on the income statement as current guidance does not specify where these items should be reported. We believe it is likely, the gains will be reported as non-operating income. However, with no formal guidance issued yet, we suggest monitoring the guidance on an ongoing basis moving forward.
For additional information contact us at info@herbein.com. Article contributed by Myriam Joseph.
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