Are you wondering about PPP and EIDL accounting? Well, you've come to the right place. Below I provide you with accounting alternatives for these COVID-19 related funds.
PPP and EDIL Accounting Confusion
At the stroke of midnight December 31, 2019, I toasted the new year and dreamed of better days. Little did I know that COVID-19 would rattle us all. Yes, I was aware of its existence. But I thought it’s was just another scare. Like SARS and Ebola. Nothing to concern me. I see differently now.
Congress, to its credit, provided lifelines to businesses and nonprofits around the country. Some breathing room, if you will. Money to tide them over. But with the money came surprising challenges, even for accountants.
As the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) were made, few were thinking about accounting. They just wanted the money. But once the funds arrived, accountants began to scratch their heads. What is this? A loan, a grant, or something else? So they checked the FASB Codification. But there was no direct guidance for some situations such as federal loans to private businesses that would later be forgiven. And so, the accounting became challenging.
If there is no direct FASB guidance, what is to be done? ASC 105-10-05-2 says “first consider accounting principles for similar transactions or events within a source of authoritative GAAP for that entity and then consider nonauthoritative guidance from other sources.” So, we look for similar accounting guidance. That might be in the FASB Codification or in the international standards.
Below you’ll see three PPP loan scenarios and three different accounting alternatives. Then you'll see a summary of the EIDL programs and related accounting guidance. Once done, you'll have a much greater understanding of PPP and EIDL accounting.
PPP Loan Accounting
First, I’ll start with the most common loan scenario: PPP loans are received and are expected to be forgiven.
1. PPP Loans Expected to be Forgiven
When loans are expected to be forgiven, consider three different possible accounting approaches. (I am providing the options I like best.)
The first accounting alternative we’ll consider is ASC 958-605.
ASC 958-605, Revenue Recognition
A small business or nonprofit receives the PPP loan. Those funds are placed in the entity’s checking account, increasing cash. And the entity records a liability, a refundable advance. As the entity substantially meets the conditions of the agreement, contribution revenue is recognized. The revenue is usually shown separately and can be titled “Forgiveness of PPP Loan” or “PPP Grant.” The contribution revenue is recorded as the entity incurs qualifying expenses. At the same time, the refundable advance (liability) decreases by a like amount.
So what guidance supports this approach? ASC 958-605, Revenue Recognition. (See my article ASU 2018-08: Nonprofit Revenue Recognition.) While 958-605 is a not-for-profit section, FASB says businesses can “analogize.” And using this approach, the entity treats the loan as a conditional contribution to the business or nonprofit.
The revenue recognition section applies to “cancellations of liabilities,” according to ASC 958-605-15-5. And some grants are recognized “to the extent that the expenses are incurred,” per ASC 958-605-55-21. So, the entity will consider the SBA PPP loan program conditions and determine if they are “substantially met.” If they are, then contribution revenue is recognized. And, again, this can be done as the expenses are incurred.
Now, let’s look at a second accounting alternative, ASC 470, Debt.
ASC 470, Debt
A business or a nonprofit can record the PPP funds as a loan using ASC 470. The entity would not impute interest at market rate. (ASC See 835-30-15-3e.) And the loan remains as a liability until it is paid or until the entity is “legally released” from the obligation. (See ASC 405-20-40-1b.) Forgiven amounts are recorded as a gain on extinguishment.
Next, we’ll examine a third accounting alternative, IAS 20.
IAS 20, Accounting for Government Grants and Disclosure of Government Assistance
A business could use of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. This method calls for recording the PPP loan as deferred income (a liability). Then grant revenue is recognized when there is “reasonable assurance” (similar to “probable” in U.S. GAAP) that conditions will be met and the assistance will be received. The revenue is recorded “on a systematic basis over the periods in which the entity recognizes as expenses the related costs.” One significant difference in this approach is the earnings can be shown as a reduction of the related expenses or as other income.
Now let’s move to the second scenario: PPP loans are expected to be partially forgiven.
2. PPP Loans Expected to Be Partially Forgiven
Larger PPP loans will be subject to greater scrutiny. Treasury Secretary Mnuchin stated that all PPP loans greater than $2 million will be audited by the SBA prior to forgiveness. If forgiveness is questionable, ASC 470 may be preferable. Why? It’s a more conservative posture. This model is dependent upon the business or nonprofit being “legally released” by the SBA. If the entity is legally released from the loan, then a gain on extinguishment is recognized and the loan balance is reduced. Amounts not forgiven remain on the books until paid.
Still, ASC 958-605 and IAS 20 are available for businesses. And ASC 958-605 is available for nonprofits. But ASC 470 may be the better model when partial forgiveness is expected. Again, the uncertainty about the forgiveness amount may merit the more conservative approach in ASC 470.
And now the last scenario: PPP loans are not expected to be forgiven.
3. PPP Loans are not Expected to Be Forgiven
When a business or nonprofit expects to repay the PPP loan or expects that the loan will not be forgiven, record the funds as a loan in accordance with ASC 470. Reduce the loan as it is paid. Finally, include the normal financial statement debt disclosures.
Which Policy is Best?
As you can tell from the above information, the accounting choice depends on the entity’s preferences and on some factors beyond the entity’s control. Regardless of the approach, the entity should clearly disclose the accounting policy. Clarity is key, especially given the lack of direct FASB guidance in some situations.
Now, let's consider the effects of PPP funds on Single Audits, if any.
PPP Loans and Single Audit
Are PPP funds subject to the Uniform Guidance single audit requirements? The answer is no. The Small Business Administration (SBA) has informed the AICPA that PPP loans made to nonprofits are not subject to single audit requirements.
Next, let’s shift gears and discuss Economic Injury Disaster Loans (EIDL).
Economic Injury Disaster Loan Accounting
Some small businesses have received funds under the Economic Injury Disaster Loan Emergency Advance program. The SBA website states that small business owners can apply for an EIDL advance of up to $10,000. The site states “This loan advance will not have to be repaid.” Therefore, these funds can be recorded as grant revenue or other income.
Additionally, some small businesses and nonprofits have received loan funds under the COVID-19 Economic Injury Disaster Loans program. Such funds are working capital loans and should be recorded accordingly (as debt). The term of the loan can be up to thirty years. And loan amounts can be up to $2 million.
Economic Injury Disaster Loans and Single Audit
The Economic Injury Disaster Loan Emergency Advance program is not subject to single audit requirements. The CFDA number for this program is 59.072 according to the Governmental Audit Quality Center of the AICPA.
The COVID-19 Economic Injury Disaster Loans program, however, is considered a direct loan (that is, payments are made by a federal agency). They are, therefore, subject to single audit requirements. (The SBA, a federal agency, disburses EIDL funds directly to recipients. Banks disburse PPP loans.) The CFDA number for this program is 59.008 according to the Governmental Audit Quality Center of the AICPA.
2020 New Year's Eve
Well, I’m hoping that the coming New Year’s Eve will usher in a better year. There is, however, one silver lining in the current one: COVID-19 has given CPAs a great opportunity to aid their clients in a time of need. I hope this information about PPP and EIDL accounting is useful to you as you continue to assist them.
A loan forgiven becomes income and should not be recorded as equity. No transaction should go directly to equity other than purchases and sales of stock (in most cases).
My 2020 taxes are done. We got a $6000 EIDL advance I put under ‘other income’. My accountant wants me to make a j/e to take out of ‘other income’ and put under ‘owners equity’. Is this correct?
Yes, I would accrue interest until the loan (and interest) is forgiven. It’s possible the loan would not be forgiven, but it appears that most will be.
Very informative. When we expect the loan to be fully forgiven and following ASC-470 do we capitalize interest or expense it until forgiven.