Governments provide different forms of assistance to entities. The form of such assistance can have varying structures, complexities, and terms. Government assistance can include tax credits, cash grants, grants of other assets, and project grants. Often, government assistance is provided to an entity for a particular purpose, and the entity promises to take specific actions. And, because of the global pandemic, governments around the world have been throwing money around like Dwayne Michael Carter Jr. (aka Lil Wayne) at certain types of clubs! This post covers the accounting for PPP loans and government grants in accordance with U.S. GAAP and, as you’ll soon learn, you’ve got options!

In the United States the most prominent type of government assistance during the pandemic were loans granted to small businesses under the Payroll Protection Program, so called PPP Loans. Under the PPP (part of the CARES Act), eligible small businesses can apply to an SBA-approved lender for a loan that doesn’t require collateral or personal guarantees. The loans have a 1% fixed interest rate and are due in two years. However, they are eligible for forgiveness (in full or in part, including any accrued interest) under certain conditions mainly related to not firing your employees. For loans (or parts of loans) that are forgiven, the lender will collect the forgiven amount from the U.S. government.

But here’s the problem. U.S. GAAP provides limited guidance on the accounting for government assistance! The FASB recently issued ASU 2021-10 Disclosures by Business Entities about Government Assistance, but as the name implies it only deals with disclosures. Not much help with respect to accounting guidance on PPP Loans! Given the unique nature of the PPP (and the fact that U.S. GAAP has limited accounting guidance), questions have arisen relating to how a borrower under the program should account for such arrangements.

Let’s look at an example:

As U.S. GAAP provides limited guidance on the accounting for government assistance, with respect to the accounting, the answer is “it depends.” That said, ASU 2021-10 (codified within ASC 832 Government Assistance) once effective will require companies to make certain disclosures about the government assistance they receive. I’ll discuss ASC 832 in a subsequent blog post. For now, let’s deal with the accounting.

Note: The information below was derived from the AICPA’s Technical Question and Answers (TQA) Section 3200.18 which can be found here. All guidance below assumes a non-governmental entity (that is, a business entity) that isn’t a not-for-profit (NFP) entity.

Although the legal form of a PPP loan is debt, some believe that the loan is more akin to a government grant. As such, the Staff of the Office of the Chief Accountant of the SEC have indicated they would not object to an SEC registrant accounting for a PPP loan under ASC 470 Debt or as a government grant by analogy to IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, provided certain conditions are met.

Let’s review these two options:

Option 1: As debt (under ASC 470 and other Topics)

Regardless of whether the entity expects to repay the PPP loan or expects it to be forgiven, accounting for it as a financial liability in accordance with ASC 470. Interest would be accrued in following the guidance within ASC 835-30 and, although the PPP interest rate is below market rate, an entity would not impute additional interest at a market rate because such transactions where interest rates are prescribed by governmental agencies. Under ASC 405, the loan would remain a liability until it is forgiven, and the debtor has been legally released or the debtor repays the loan. Pretty straightforward.

Option 2: As a government grant (using IAS 20)

Under this model, governmental assistance is not recognized until there is reasonable assurance – similar to “probable” under U.S. GAAP – that any conditions attached to the assistance will be met and the assistance will be received. A business entity would record the cash inflow from the PPP loan as a deferred income liability. Once there is reasonable assurance that the conditions will be met, the earnings impact of government grants is recorded “on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.” Specifically, a business entity would record the cash inflow from the PPP loan as a deferred income liability, with the offset through earnings (presented as either (1) a credit in the income statement, either separately or under a general heading such as “other income,” or (2) a reduction of the related expenses), as it recognizes the related cost to which the loan relates, for example, compensation expense. 

However, there are two other options. If a business entity expects to meet the PPP’s eligibility criteria and concludes the PPP loan represents, in substance, a grant that is expected to be forgiven, the AICPA staff observes the entity can also analogize to ASC 958-605 or ASC 450-30 when determining the accounting for such loans.

Option 3: As a contribution (under ASC 958-605 for NFPs)

ASC 958-605 addresses the accounting for contributions by NFPs. Although the scope of this guidance excludes contributions made by governmental entities to business (for-profit) entities, the FASB staff has acknowledged that entities scoped out of that guidance are not precluded from applying it by analogy when appropriate.

Under this model, the timing of recognition for a contribution received depends on whether the contribution is conditional or not. If conditional, the contribution is not recognized until the conditions are substantially met or explicitly waived. Specifically, a nongovernmental entity would initially record the cash inflow from the PPP loan as a refundable advance. The nongovernmental entity would then reduce the refundable advance and recognize the contribution once the conditions of release have been substantially met or explicitly waived.

Option 4: As a gain contingency (under ASC 450)

ASC 450-30 outlines a model for gain contingency recognition. Under this model, the earnings impact of a gain contingency is recognized when all the contingencies related to receipt of the assistance have been met and the gain is realized or realizable. As applied to forgivable loans received under the PPP, a business entity would initially record the cash inflow from the PPP loan as a liability. The proceeds from the loan would remain recorded as a liability until the grant proceeds are realized or realizable, at which time the earnings impact would be recognized.

There you have it! The 4 options available under U.S. GAAP related to the accounting for PPP loans and government grants.

I hope this blog has helped guide you through the options of accounting for PPP loans and the required disclosures of government assistance required by ASC 832. This topic will certainly be covered in our U.S. GAAP Update courses this year!

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