- Post-election, the SBA has provided more PPP loan forgiveness approvals.
- The IRS also recently issued guidance that impacts PPP loans.
- Under ASC 470, liability debt would be derecognized when the debtor has been “legally released” or when the loan is repaid.
With the election behind us, we have seen more Paycheck Protection Program (PPP) loan forgiveness approvals by the Small Business Administration (SBA), and now there is guidance recently released by the IRS. Take a deeper dive into two accounting alternatives for forgiveness:
- FASB Accounting Standards Codification (ASC) 470, Debt
- International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance
Note that this article focuses on privately held for-profit organizations. Before you proceed, consider reading “How to Account for Forgivable PPP Loan Proceeds,” an article that addresses the complexities related to accounting for loan forgiveness and provides additional context for forgiveness alternatives.
Application of ASC 470, Debt
As a reminder, ASC 470 requires the initial receipt of PPP loans to be recorded as a financial liability. This liability would be derecognized when the debtor has been “legally released” or when the loan is repaid. At that time, forgiveness is recorded as a gain on extinguishment of debt.
Consider this alternative for the following reasons:
|Ease of accounting||Straightforward and easy to support|
|Ease of understanding||Both users and preparers can easily comprehend|
|Accounting consistent with bank reporting||Banks will account for this debt as loans receivable until forgiven by the SBA|
Application of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance
Like ASC 470, IAS 20 requires accounting for the initial receipt of PPP loans as a liability. However, unlike ASC 470, this liability can be derecognized when there is “reasonable assurance” (akin to the “probable” definition used in U.S. generally accepted accounting principles [GAAP]) that the loan conditions will be met and forgiveness will be granted. Once forgiven, record the amount as either other income or as a reduction of related expenses, based on company policy elections.
- A government grant is recognized only when there is reasonable assurance that (a) the entity will comply with any conditions attached to the grant and (b) the grant will be received. [IAS 20.7]
- Grants are recognized as income, on a systematic basis, over the period necessary to match them with the related costs for which they are intended to compensate the grant recipient. [IAS 20.12]
- A grant relating to income may be reported separately as “other income” or deducted from the related expense. [IAS 20.29]
- If a government grant becomes repayable, the effect is accounted for as a change in accounting estimate (see IAS 8).
Consider this alternative for the following reasons:
|Matching||Related costs can be offset by forgiveness in the same period|
|Conditional terms of grant can be easily supportable||Obtaining “reasonable assurance” requires professional judgement; therefore, recording grant income is made more viable when conditions are easily met and supported|
|Group all 2020 events in one year||This has not been a typical year, so some entities wish to resolve all 2020 matters in one year and not carry any forward to 2021|
One additional word of caution: evolving SBA and U.S. Department of the Treasury guidance, coupled with complexities and uncertainties of forgiveness for certain entities, may make this alternative difficult to support. Review the following considerations related to these matters.
IAS 20 reasonable assurance considerations
First, let’s consider scope. Our guidance covers PPP loans, which we believe can be considered akin to grants within the scope of the guidance provided in IAS 20. If your organization received funding under other programs, consider scope to determine if IAS 20 applies to those other grants.
Now, the $2 million dollar question, how does one determine reasonable assurance of forgiveness for PPP loans?
Under IAS 20, government grants are transfers of resources to an entity by the government in return for past or future compliance with certain conditions relating to the operating activities of the entity. Government assistance is intended to provide an economic benefit that is specific to an entity qualifying under certain criteria.
The entity recognizes government grants only when there is reasonable assurance that the entity will comply with the conditions attached to the grants and that the grants will be received. “Reasonable assurance” means that there is a remote likelihood that the event will not occur. Government grants are recognized in profit or loss on a systematic basis over the periods in which the entity recognizes the related costs for which the grants are intended to compensate as expenses.
Conceptually, an organization can likely equate PPP loans to government grants. The conditions of the PPP loans usually provide a direct incentive for small businesses to keep their workers on the payroll. As a result, the SBA will forgive loans if all employee retention criteria are met and the funds are used for eligible expenses.
As you determine probability, consider the likelihood of an event occurring divided by the number of expected outcomes of the event. With multiple events, break down each probability into separate, single calculations and then multiply the results to achieve a single possible outcome and find overall probability.
Review some criteria to consider as you determine probability of forgiveness:
|Loan size||$50,000 or less, over $50,000 but less than $2M, or over $2M|
|Eligibility||Yes or no|
|Use of funds||All, partial, or none|
|Applied to the bank||Yes or no|
|Approved by the bank||Yes or no|
|Approved by the SBA||Yes or no|
These factors and others allow you to group your considerations to determine probability of forgiveness. Assess the likelihood of each event, as applicable, and weight them based on the significance of each event. Use available information such as status of your forgiveness, complexity of your application, eligibility, and comparable forgiveness results of other entities with similar factors.
“We all believe that the spirit of this program was to provide immediate assistance to small businesses in an extremely challenging time. Based on what we’ve seen to date, loans are being forgiven. Don’t overthink the accounting, but do evaluate individual facts and circumstances. Assessing probability requires professional judgement,” said Stephanie Markert, principal with CLA and national assurance global leader.
Consider common misconceptions concerning this standard in the U.S. related to “Type I” and “Type II” subsequent events:
- Type I — Subsequent events that provide additional evidence about conditions that existed at the balance sheet date — including estimates that are inherent in preparing financial statements — should be recognized in the financial statements.
- Type II — Subsequent events that provide evidence about conditions that did not exist at the balance sheet date should not be recognized in the financial statements.
These concepts do not apply to IAS 20 probability considerations. Remember that IAS 20 is based on the likelihood of compliance with conditions of the grant versus the actual approval of forgiveness as required by ASC 470.
The IRS recently released Revenue Procedure 2020-51 and Revenue Ruling 2020-27, which are further addressed in our recent article. This guidance introduces the concept of “reasonable expectation of reimbursement,” which results in eligible expenses for forgiveness being excluded from deduction for tax purposes. Consider these factors when determining proper tax and accounting treatment for these costs and recognition of revenue.
- Mike Westervelt, Principal, CLA
Compliments of CliftonLarsonAllen – a member of the EACCNY.