How to Ensure Proper Accounting for PPP Funding and Loan Forgiveness

Additionally, the response provided in a prior FAQ states vintage reporting on FR Y-14Q Schedule J should also align with the same major modification requirements. However, the relevant loan population of Schedule J includes loans reportable on the FR Y-14M, which does not contain the same reference as the FR Y-14Q Schedule H regarding major modifications. On the FR Y-14M, the loan closing date, which is defined as the date the loan was originally closed, is stated to determine a loan’s vintage.

• The Board’s Final Notice relating to the March 2020 proposal by the Board to revise the FR Y-14A/Q/M reports , indicated that client cleared derivatives exposures will only be used for monitoring purposes and not used in stress tests.
• If there is not probable loan forgiveness, a business entity should assess whether this accounting treatment or treatment under FASB ASC 470,Debtis most appropriate for users of its financial statements.
• If their approval is merely administrative, it’s not a barrier but a substantive process.
• Businesses, including mortgage bankers, must meet certain eligibility requirements to receive PPP loans and are required to meet PPP guidelines to receive loan forgiveness.
• Report both house and client exposures to the CCPs and report these counterparties at the legal entity level, as opposed to consolidated entity level.

If the loan has an option to have periodic interest and principal schedules, which may or may not fall on the same date, that situation would be considered non-standard amortization. The Firm has taken the position in concert with the FASB guidance stated above, that an amendment to a credit agreement solely for the purpose of transitioning from LIBOR to alternate pricing does not meet the definition of a re-pricing event for FR Y-14Q Schedule H reporting. Accordingly, the Firm will not report a renewal date for such amendment to a credit agreement until the Firm receives clarification from you.

Accounting for the Paycheck Protection Program (PPP) Proceeds and Forgiveness

Government grants shall be recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. The accounting and disclosure requirements for government assistance provided https://www.wave-accounting.net/ to businesses depends on whether the assistance is considered a loan, payment for a good or service, an income tax credit, or a grant. Each borrower under the PPP program should carefully analyze its unique facts and circumstances in determining the appropriate accounting.

Changes in the expected forgiveness amounts should be accounted for prospectively as a change in estimate. The loan will remain recognized as a debt until the government issues a formal notice of its forgiveness in response to the business’s loan forgiveness application. Many of our clients have taken advantage of the Small Business Administration’s Paycheck Protection Program . PPP loans are providing essential relief to businesses that might otherwise be forced to cut staff, or worse. With the cash in hand, now is the time to understand how the loan should be treated for accounting and tax purposes. Selection of the appropriate accounting policy is a function of management’s intent to seek forgiveness of the PPP loan, ability to meet the conditions of forgiveness, and address uncertainties in the qualifications.

Defining the Programs

There is widespread awareness and utilization of PPP loans, but numerous questions remain. The AICPA has recently provided guidance on one of them – How should an organization account for the PPP loans? The AICPA’s Center for Plain English Accounting published a special report on this topic entitled “Accounting in the Fog of War – Treatment of PPP Loans”. Unless impracticable, the amount of government assistance received but not recognized directly in the financial statements. The impact of the pandemic may result in a reasonable possibility that estimates will change by a material amount in the near term, especially for organizations that estimate based on metrics such as stock and commodity prices, interest and currency exchange rates and revenue forecasts.

• The IAS were replaced in 2001 by International Financial Reporting Standards .
• Under the PPP, eligible businesses can apply to an SBA-approved lender for a loan that does not require collateral or personal guarantees.
• Once forgiven, record the amount as either other income or as a reduction of related expenses, based on company policy elections.
• No amount should be recognized in income until the period in which measurable barriers have been substantially met.
• We anticipate clarifying guidance will be forthcoming, and accepted practice to emerge, with respect to such presentation within the income statement.
• Treasury Department, the PPP offers cash flow assistance to nonprofit and small business employers through guaranteed loans for expenses incurred between February 15, 2020, and December 31, 2020.

Per the instructions for FR Y-14Q Schedule H.2, Field 20 for loans with a monthly amortization schedule, report the original amortization term of the loan in months from the date given in Field 10 at the rate implied by the current payment disregarding U S. Gaap Accounting And Reporting Considerations For Ppp Loans For Business Entities any balloon payment. For the purposes of Field 20, the phrase “disregarding any balloon payment” means to calculate amortization based on the full loan balance and not subtract the expected balloon payment from the loan balance.

In-Substance Government Grant Model

It should be noted that a borrower should not recognize any income from the extinguishment of its debt until the borrower has been legally released as the primary obligor under the loan. “Report both house and client exposures to the CCPs and report these counterparties at the legal entity level, as opposed to consolidated entity level.” Designated central clearing counterparty exposures should include both cleared OTC derivatives and exchange traded derivatives. For counterparties that clear both OTC derivatives and exchange traded derivatives , provide a breakout of the amount of exposure reported for each in the notes section of the CCR schedule or a supplemental Excel file submitted as supporting documentation. Per the instructions effective June 30, 2020 for Sub-schedules L.1.a, and L.1.b data to be provided is at the counterparty legal entity level. For Counterparty, Schedule L, sub-schedule L.1.E , the FRB’s instructions require reporting of Gross CE and Net CE of Fair Value SFTs.

Additionally, the borrower should consider the disclosure requirements of the specific accounting guidance applied to the PPP loan (that is, ASC 470, IAS 20, ASC , or other guidance). On the basis of discussions with the SEC staff, we believe that if the PPPL is material, the staff would expect an SEC registrant to provide disclosures in the footnotes to its financial statements that discuss how the PPPL is accounted for and where the loan is presented in its financial statements. Further, a registrant should consider disclosing how the PPPL affects its ability to operate and whether it is at risk for being unable to continue to operate without the PPPL. However, as noted above, we believe that IAS 20 provides the most comprehensive accounting model for government grants, and it has been widely applied in practice to government grants received by business entities. Therefore, if an entity has concluded that the PPPL should be accounted for as debt under ASC 470, it should not recognize any income from the extinguishment of its debt until the entity has been legally released as the primary obligor under the loan. Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.

Accounting for Borrowers

Despite the guidance issued by the SBA, uncertainty still surrounds both the interpretation of certain aspects of the initial eligibility for PPP loans and the criteria for forgiveness. As a result, the possibility of an SBA review should be considered when the borrower expects loan forgiveness. It’s this uncertainty as to how the SBA will interpret and enforce the program’s rules that can make it difficult to conclude that loan forgiveness is probable. For this reason, except in situations where it is evidently clear that forgiveness of a PPP Loan is not in question, we recommend the Debt Approach be used. PPP loans, exactly as the name describes, are borrowings that bear interest and have specified repayment dates.

According to the SBA’s rule regarding lender and SBA responsibilities, a borrower, in order to receive forgiveness on a PPP loan, must submit an application for forgiveness to the creditor. The creditor, in turn, issues a recommendation to the SBA within 60 days on whether the borrower is entitled to full, partial, or no forgiveness of the PPP loan, and requests payment from the SBA equivalent to the amount for which it recommends forgiveness . If the SBA concurs with the creditor’s recommendation, the SBA pays the creditor for the amount forgiven, plus any interest that accrues through the date of payment.