How to account for forgivable PPP loans

Since the first round of the Paycheck Protection Program was rolled out as part of the CARES Act last spring, more than 5 million businesses, including some auto dealerships, have benefited from PPP loans.

If PPP funds are used to cover payroll, mortgage interest, rent and utility expenses and meet other criteria, the loans may be forgiven and converted to grants (i.e. non-taxable income). However, if you have received a PPP loan, and been granted forgiveness, the question we hear most often is “how do I account for this PPP loan on my books?”

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Review AICPA guidance

The American Institute of Certified Public Accountants (AICPA) recently published guidance to help borrowers understand how to account for forgivable PPP loans. According to the guidance, businesses that follow U.S. Generally Accepted Accounting Principles (GAAP) should follow these steps when reporting these loans:

• Initially record the cash inflow from the PPP loan as a financial liability. This presents a portion of the PPP loan proceeds as a long-term liability on your balance sheet based on the payment terms of the note.
• Note that PPP loans accrue interest at 1%. Interest will accrue in accordance with the interest method under the accounting rules for imputation of interest. Additional interest won’t be imputed at a market rate.
• The PPP loan remains on your balance sheet as a liability until 1) it has been wholly or partially forgiven and you’ve been legally released from your repayment obligation by the Small Business Administration (SBA), or 2) if the loan is not forgiven or only forgiven partially, you service the debt as you would any other loan in repayment until extinguished.
• Reduce your liability by the amount forgiven (either the whole or a partial amount) and record a gain on extinguishment once the loan and related interest has been wholly or partially forgiven and your payment obligation has been legally released by the SBA.

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Compare with IAS 20

According to the AICPA guidance, if you expect to meet the PPP’s eligibility criteria for loan forgiveness and conclude that the loan represents a grant that’s expected to be forgiven, you may follow analogous international guidance. International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, covers how to account for the loan if certain conditions are met.

Under this guidance, your business can’t recognize government assistance until it’s probable that any conditions attached to the assistance will be met and the assistance received. The term “probable” under IAS is analogous to “reasonable assurance” under U.S. accounting standards.

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Prepare for an audit

Recipients of PPP loans of $2 million or more should expect an audit if they apply for loan forgiveness, according to the Small Business Administration. Properly accounting for a forgivable PPP loan could be critical if your dealership is audited by the federal government. While this article provides general information, your specific PPP forgiveness calculation – and the related accounting treatment – can be unique. Contact your CPA for specific guidance in your situation.

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