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From McKonly & Asbury
As many companies are planning for their year-end financial reporting process, one of the many considerations is accounting for their Paycheck Protection Program (PPP) loan. Companies basically have 3 options in how to record their PPP loan. There are pros and cons to each of the options and certain methods are preferred over others. Let’s take a look at these options:
DEBT MODEL (ASC 470)
- This model is the AICPA “Safe Harbor” model and is the preferred accounting approach to be utilized by for-profit companies.
- Delays recognition of the gain on forgiveness until the debtor has been legally released as the primary obligor.
- Generally, companies receiving more than $2M in the PPP Loan and subject to additional audit and further scrutiny may prefer this approach.
GOVERNMENT GRANT MODEL (ASC 958-605)
- This is the preferred accounting method for nonprofit organizations, but may also be “elected” by for-profit companies. This is a rare exception in accounting in which a for-profit entity can elect to follow the nonprofit accounting rules.
- The initial amount is recorded as a refundable advance (current liability).
- The Company records the “grant income” at the point in which they “substantially met” the criteria for proper use of the funds. The company must be able to verify the actual expenditures for their intended purpose and that they met the headcount requirements at the end of the measurement period.
- This method requires management to perform calculations when/as the funds are being used and the criteria have been “substantially met” in order to prove (to themselves and the auditors) that they have met the forgiveness criteria.
IAS 20 MODEL: ACCOUNTING FOR GOVERNMENT GRANTS
- This is the most aggressive model and also has the most risk and potential scrutiny associated with it by Board of Directors, bankers and auditors.
- This may only be applied to for-profit entities and management must elect to follow this International Standard as an accounting policy choice.
- Allows management to project the likelihood of meeting the PPP loan program forgiveness criteria and recognize the gain when management deems it probable that they will meet the conditions.
- Results in earlier derecognition of the liability, essentially recognizing income as it is spent.
- Allows loan forgiveness to be presented as a reduction to payroll or other qualifying expenses for which the funds were used.
- Under the International Standards, management must be virtually certain that the loan will ultimately be forgiven.
Companies that have chosen the debt model require minimal additional documentation or audit procedures and disclosures and all accounting is simply treated as debt. For the Grant Model and the IAS 20 Model, management may need to prepare additional analysis and calculations and provide much supporting documentation to prove that the funds were appropriately used and when they were used. It may be additional work for management and this should be a consideration in choosing your accounting policy. While the effort and cost should not be the deciding factor in determining the most appropriate accounting policy, it is something to consider.