An ISCPA Member sent us a question asking how to handle PPP Loans on GAAP financial statements.
They had several clients that had applied for forgiveness by 12/31/20 and anticipate their PPP loans to be fully forgiven but have not officially received forgiveness yet. They understood that the loan can either be presented as a long term liability or the PPP proceeds can be treated as a grant in 2020 and report it as other income.
ISCPA sent this question to Ed Zollars - who offered some great information to help make that decision:
The AICPA's TQA 3200.18 is basically what we have on the issue, with both FASB and SEC staff effectively referring all questions to this document. (https://www.aicpa.org/content/dam/aicpa/interestareas/frc/downloadabledocuments/tqa-sections/tqa-section-3200-18.pdf )
So the options are:
- Treat as a loan, record interest, and then treat as income (non-operating I'd suggest) when forgiven. This has the advantage of being the easiest to explain to a bank, since they can follow that logic fairly easily. So if this was the user of the financial that management is most concerned about I'd probably go this route (and most CPAs I've talked to seem to have gone this route). But you are stuck with this liability that will never be paid until the bank formally tells you the SBA has approved your forgiveness application.
- Treat as a conditional grant. Recorded as deferred revenue and taken into income as the requirements are satisfied. There's a minor complication there about how you integrate the potential reduction of forgiveness due to FTE/wage rate reductions in there (how do we determine how much of those requirements we've met). But regardless of that, it has the advantage of getting this "questionably real" liability off the balance sheet at the latest by the date the money has been expended and we know we don't have an FTE/wage rate problem.
While the AICPA guidance is technically "unofficial" and one might research the ASCs looking for some alternatives, the reality is that a practitioner may have the fewest questions raised if they follow the TQA.