History of the Paycheck Protection Program
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the US economy, including $349 billion that was earmarked for the Paycheck Protection Program (PPP) to be administered by the U.S. Small Business Administration (SBA). An additional $310 billion was later authorized for the PPP.
Under the PPP, eligible businesses can apply to an SBA-approved lender for a loan that does not require collateral or personal guarantees. The loans have a 1% fixed interest rate and are due in two years. However, these loans are eligible for forgiveness (in full or in part, including any accrued interest) under certain conditions. For loans (or parts of loans) that are forgiven, the lender will collect the forgiven amount from the U.S. government. A recent bill has extended the repayment term to five years for any portion of the loan not forgiven.
Businesses, including mortgage bankers, must meet certain eligibility requirements to receive PPP loans and are required to meet PPP guidelines to receive loan forgiveness. Therefore, it is vital to maintain detailed documentation of the initially submitted eligibility criteria, submitted by management, as well as detailed PPP loan expenditure documentation to support payroll expenses and other eligible expenses used for loan forgiveness.
Loan forgiveness applications are subject to audit by the U.S. government with a 6-year statute; however, businesses that borrow less than $2 million are expected to receive an automatic “good faith” certification, which may mean these businesses will not be subject to an audit. Future scrutiny of the good faith certification will depend on additional guidance issued by the SBA.
Businesses that received a loan over $2 million will be subject to greater scrutiny, audit, and may be deemed ineligible. The SBA may request repayment if it is determined required expenditure guidelines were not met and more importantly, the business entity did not actually qualify for a PPP loan.
Authorized Use of Loan Proceeds
A bill passed June 5, 2020 has extended the forgiveness period from 8 weeks to 24 weeks, lowered the percentage spent on payroll costs from 75% to 60% with the remainder allotted for rent, utilities, and interest payments. This new legislation contained the stipulation that if a minimum of 60% is not used for payroll costs, no amount of the loan can be forgiven. However, following the bill’s passage, the U.S. Treasury and SBA released a joint statement clarifying that borrowers who fail to meet the 60% threshold would qualify for partial loan forgiveness. You can choose which accounting rule to apply with respect to the PPP loan. Costs are defined below:
“Payroll Costs” – This is a key term for PPP loans and includes virtually all compensation paid to employees, as salaries, commissions, or similar compensation, including tips, vacation pay, family/parental leave and sick leave. Total compensation is capped at $100,000 per year for any person, and does not include payroll taxes imposed on the employer or withheld from the employee, plus:
- Any state or local taxes assessed on the compensation of employees paid by the employer
- Severance pay (allowance for dismissal or separation)
- Costs related to the continuation of group health benefits and any retirement benefits (presumably including all COBRA benefits) Payments of interest on any pre-existing debt or mortgage obligation (but not payment or prepayment of principal on such obligations)
- Rent (including rent under an equipment or other lease), and
Eligibility for Loan Forgiveness
PPP loan recipients must certify, in good faith, that the loan was required to continue operations due to the current economic circumstances and acknowledge that the funds have been used to retain workers and maintain payroll or make business interest, rental or lease and utility payments, and that the applicant does not have other “covered loan” applications pending for similar or duplicative purposes.
Alternative Accounting Treatment for PPP Loan Proceeds
Under the Financial Accounting Standards Board, Accounting Standards Codification (ASC) 470, Debt, a PPP loan is considered debt, regardless of whether the borrower expects the loan to be forgiven. Alternatively, the borrower may choose to consider the loan as a government grant and amortize the funds as they are used and there is a reasonable possibility of the loan being forgiven.
A Closer Look: Accounting for the PPP Loan as Debt
Under ASC 470, a business entity would record the full amount of the PPP loan as a liability and accrue interest over the term of the loan until the loan is forgiven. Considerations: This model would be more prudent for an entity that determines there is a reasonable possibility of not meeting the necessary criteria for loan forgiveness, or the business entity determines that maintaining the debt for financial statement reporting purposes does not impact debt eporting requirements or other financial metrics.
For income statement purposes, any PPP forgiveness would be considered gain on extinguishment of debt. For cash flow statement purposes, PPP loan proceeds would be considered a financing cash inflow; repayments would be considered a financing cash outflows; and forgiven amounts would be a noncash financing activity.
Accounting for the PPP Loan as a Government Grant
The current CARES Act/PPP framework provides clear guidance on the eligible uses of the PPP loan. Businesses that have high degree of confidence in their ability to qualify for loan forgiveness, and believe they have or will meet the authorized expenditure requirements are able to amortize the loan to income as expenses are accrued or paid. While there are no clear U.S. generally accepted accounting principles (U.S. GAAP), references related to this type of government loan provided to for-profit entities, an analogy could be made to ASC 958, Not-for-Profit Entities, Conditional Contribution or ASC 450, Contingencies, Gain Contingencies. While not U.S. GAAP, International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure, provides a model to account for and forgive government loans. Under this model, the PPP loan would be accounted for as a grant, and a deferred liability established when funds are received. The deferred liability would be recognized in earnings in accordance with the requirements of the authorized PPP expenditures. Considerations: If this accounting treatment is elected, the business entity will have to continually assess whether it continues to meet the eligibility criteria. The SBA has also stated that it will provide further guidance and clarification regarding acceptable PPP expenditures.
For income statement purposes, the amortization of the grant would be reflected as other income, or a reduction of the expense to which it pertains.
For cash flow statement purposes, loan proceeds could be considered operating cash inflows because of nature of the expenses for which the loan is intended (e.g., payroll, rent). However, loan proceeds from financing activities may also be acceptable.
For either accounting treatment, the business should disclose the nature of the PPP, including the funds received, the amount deferred, the recognition of deferred amounts, and the requirements to recognize the deferred amounts as income.