10 FAQs: Accounting for PPP Loans and Forgiveness

Financial Statement Accounting and Reporting Requirements

Under the Paycheck Protection Program (PPP), the federal government authorizes up to $349 billion in forgivable loans to small businesses during the COVID-19 crisis. Small businesses are receiving loans, and many have questions on how to account for the funds, expenses, and forgiveness in their accounting records.

Currently, no guidance has been issued to specifically address the financial statement accounting and reporting requirements for a program like the PPP. There is some general guidance within the accounting standards issued by the Financial Accounting Standards Board that may be applied to this situation. Learn more below from frequently asked questions we hear from our clients:

How do I record the proceeds received from PPP?
The legal form of a PPP loan is a debt instrument. As a result, the proceeds should be presented as debt on the balance sheet, following Accounting Standards Codification (ASC) 470.

Is the PPP loan recorded as short-term or long-term debt?
In most cases, the balance should be treated as current debt versus long-term. The debt term should be evaluated on a case by case basis. For example, if a business is not expecting the full loan amount to be forgiven, it could be determined a portion of it would be presented as long-term.

How are costs incurred to obtain the loan treated?
Costs paid to third parties in conjunction with securing a PPP loan are amortized over the term of the debt. These costs could include document fees, closing costs, accounting, and legal fees. The CARES Act prohibits lenders explicitly from charging fees for the processing of PPP loans, and these amortizable costs are expected to be minimal.

Should interest be imputed or accrued?
Under ASC 470, an entity is required to accrue interest at the stated rate of the note, which for PPP is 1 percent. For purposes of the PPP program, principal and interest payments are deferred for six months. Interest accrues starting at the funding date. Interest is not required to be imputed to a market rate due to government agency transactions being specifically excluded in ASC 835-30.

Businesses maintaining their accounting records on the cash basis method of accounting are not required to accrue interest but expense the interest when paid.

When should the forgiveness be recognized?
An entity that has accounted for the PPP loan as debt should not recognize income from the extinguishment of its debt until the entity has been legally released as the primary obligor under the loan. For PPP loans, this condition is generally satisfied when all the loan forgiveness conditions have been met:

What will the forgiveness look like in the financial statements?
The income resulting from forgiveness will be measured based on the net carrying value of the PPP loan, which should include accrued interest (if forgiven) and unamortized financing costs relating to the forgivable portion of the loan. Within the income statement, this income is presented as a separate line item in the other income and expense section.

For cash flow statement purposes, the receipt of the PPP loan proceeds accounted for as debt would be presented as cash from financing activities. Any amounts repaid would be presented as cash outflows from financing activities, and any amounts forgiven would be disclosed as a noncash financing activity.

How do I record the expenses paid with the PPP loan proceeds?
The eligible expenses paid using PPP funds should continue to be accounted for in the traditional manner. Payroll, rent, utilities, and mortgage interest are shown in the income statement as usual when paid or accrued, depending on accounting method of the entity.

Will disclosure footnotes be required in my year-end financial statements?
It is expected additional guidance will be issued related to financial statement presentation and disclosures. To the extent that a PPP loan remains outstanding at a financial statement reporting period, particularly year-end, entities should consider disclosing uncertainties related to eligibility and complexity of the PPP loan forgiveness process.

How do I account for the tax consequences of PPP loan forgiveness?
Under current guidance, the forgiveness of the PPP loan will not impact an entity’s income tax expense: