The CARES Act, including subsequent amendments, earmarked over $600 million through the Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA), for potentially forgivable loans to support eligible small businesses impacted by COVID-19. As of December 31, 2020, the Company X expects to meet all the forgiveness eligibility requirements and concludes that the full forgiveness of $700,000 is probable. The proceeds from the loan would remain recorded as a liability until the grant proceeds are realized or realizable, at which time the earnings impact would be recognized. If you're unsure if you are going to apply for forgiveness, you can use the debt model under U.S. generally accepted accounting principles (GAAP), recognizing the money as a loan. For ITB financial statements, you would still include those nondeductible expenses. When U.S. GAAP does not provide one exclusive accounting treatment for a transaction, as is the case here, the significant accounting policies footnote should describe the policy that an organization applies. Currently, expenses paid for with loan proceeds are not tax deductible. This raises questions about how to present PPP loans in year-end financial statements and how to treat a loan that was forgiven. Citizens customers should submit applications for PPP loan forgiveness through Citizens' portal (not via the SBA), using credentials previously provided. | Wipfli For example, under current regulations, an organization that acquires another organization that has received PPP funds might need approval from the SBA prior to consummation of the acquisition or repay the PPP funds. statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K . (35). Just like everything else regarding the COVID-19, nothing is simple. With respect to for-profit organizations, the CPEA points practitioners to four models to consider for the accounting for PPP loans: As a matter of practicality, the first and third model are likely the prevalent choices, as they are supported by robust accounting guidance of the U.S. GAAP framework that practitioners are already familiar with. Once the entity is legally released as the primary obligor from the creditor, the liability would be derecognized and a gain on PPP loan extinguishment would be recorded. Contributions, as defined, can include the cancellation of liabilities. How should that be booked? 4. Review eligibility for the employee retention credit (ERC). Under ASC 450-30, the earnings impact is recognized when all contingencies have been met and the gain related to the forgiveness of the PPP loan is realized or realizable for nongovernmental entities. How to solve business problems and mitigate the risks, Make your transformation deliver on its promise. Your email address will not be published. Copyright 2023 Spiegel Accountancy | Privacy Policy |Terms & Conditions of Use | Designed by Champagne Rain Creative Services, Designed by Champagne Rain Creative Services, 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. To assert the necessity of a PPP loan, as noted in Questions 31 and 37 of the SBAs PPP FAQs, an entity must take into account its ability to access other sources of liquidity sufficient to support its ongoing operations in a manner that is not significantly detrimental to its business. 2. 15. Following the issuance of the Paycheck Protection Program Flexibility Act of 2020, signed into law in June, borrowers under PPP loans are required to begin repaying any amounts not forgiven at the later of (a) 10 months following the borrowers covered period, or (b) when the SBA remits any amounts forgiven to the lender. Download our 2021 financial reporting playbook for more accounting guidance and strategies for successful reporting on government assistance programs. Peter Calcara Akay Mahallesi, Yukar ki Sokak If accounted for as debt, the relevant disclosures required by ASC 470 (for example, debt maturity table), The financial statement line items and relevant amounts impacted by the accounting for the PPP loan, The organizations expectation of being forgiven, including whether forgiveness has been received or the application for forgiveness has been filed, Risks of meeting eligibility and forgiveness requirements, including the SBAs ability to audit, A copy of the PPP loan application, including calculations and support for employee headcount and employee compensation, A copy of the loan forgiveness application, including all worksheets, calculations, and support for all figures, Documentation supporting the organizations need for the loan, including relevant emails and memos, If applicable, the organization's completed loan necessity, Failing to apply the $100,000 salary limitation cap on employees with annualized salaries in excess of $100,000, Including payments to independent contractors in their calculation of payroll costs eligible for reimbursement, Calculating average full-time employees (FTEs) at a company-wide (versus at an employee-by-employee) level, Inappropriately using the FTE reduction safe harbors. Through this approach, for-profit entities would analogize the accounting treatment with the not-for-profit U.S. GAAP guidance for contributions. In addition, all entities should consider whether conclusions regarding their ability to remain a going concern are premised upon receiving debt forgiveness for the PPP loan. According to the SBAs 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. Borrowers that present a classified balance sheet should determine the appropriate classification of a PPP loan according to the classification guidance in ASC 210-10-45 (with those entities accounting for PPP loans under ASC 470 also considering the guidance in ASC 470-10-45) based on the loans contractual terms. Technology companies spend every day in the bullseye of cyberattacks. AICPA issues guidance on accounting for forgivable PPP loans Under this option, entities record the loan as a liability on the balance sheet and interest is recorded as it would be with any other financing arrangement. WA has an Awesome Residual Income Affiliate Program! The information should include the date of issue, nominal amount, book value, description of the loan, interest rate, interest paid and maturities. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in the bulletin. Browse our thought leadership, events and news for insights and a point of view on business-critical topics. Additionally, subsequent to the passage of the CARES Act, the IRS clarified in Notice 2020-32 that (i) no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of the PPP loan, and that (ii) the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act. Following is the presentation on the financial statements and tax provision: The non-deductible compensation expense and non-taxable grant income occurs in the same tax year. The remaining loan balance of $ {Amount of Loan after Forgiveness} bears interest at a rate of 1% and is payable in monthly installments of principal and interest over 24 months beginning 6 months from the date of the note as follows: 202x $ {Amount} 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. Everything is going to depend on the unique situation of each loan recipient, but there are some emerging distinctions. The financial statement line items - and relevant amounts - impacted by the accounting for the PPP loan The organization's expectation of being forgiven, including whether forgiveness has been received or the application for forgiveness has been filed Risks of meeting eligibility and forgiveness requirements, including the SBA's ability to audit 4. In late 2020, updated stimulus legislation expanded eligibilityfor certain payroll tax credits, including the employee retention credit, to include organizations that received a PPP loan. Jennifer Cryder The COVID-19 is having a huge impact on the global economy, with manufacturers and the travel industry bearing the initial brunt as the impact expands. Alternative Accounting Treatment for PPP Loan Proceeds. Please search again using different keywords and/or filters. The loan is subject to a rating from {date of note} and may be granted to the extent that the proceeds of the loan are used for eligible expenses such as payroll and other expenses described in the CARES Act. The Voice of the CPA Profession Gets Tax Fix Done! The loan bears interest at an interest rate of 1% and is payable in monthly installments and interest over 24 months from 6 months from the date of the obligation. When you buy through links on our site, we may earn an affiliate commission. Meet with your advisors now, if you havent started already, to discuss your options and strategy. (ie 08.20 payroll, 09.20 rent, 10.20 utilities, etc. (13). Now is the time to be working closely with your advisors to understand your options. 15. To record the receipt of PPP loan proceeds. (27), Acceptable Accounting Policies for PPP Loan Proceeds For financial statements prepared under generally accepted accounting principles (GAAP)(28), When you treat your PPP loan as debt, its recognized as a financial liability (with interest accrued) on your balance sheet. AffiliatePal is reader-supported. Many taxpayers are electing to use the 24 week covered period and are applying for forgiveness in Q4 of this year. 2020 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. 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