How to account for PPP forgiveness—Hint: don’t give in to temptation. 

The Paycheck Protection Program, or PPP as its widely known, has provided lifeline loans for many organizations, especially smaller ones, as a way to survive the pandemic. As with any loans, these become liabilities, which must be tracked via accounting systems until they are repaid. PPP have the additional twist of possibly being forgivable, and if forgiven, can be taken off the books earlier than their original due date, i.e., before repayment.

This unique situation creates a bit an accounting quandary, as companies are tempted to write PPP loans off the books ASAP—even if the forgiveness is only predicted—to make their overall P&L look better. Companies and investors are keen to do this as early as possible, possibly causing consternation for the accounting team.

While this preemptive write-off is very tempting, diligence is highly recommended to avoid GAAP or other regulatory issues.

I advise my clients that their PPP debt should not be extinguished until either a) the debtor pays the creditor or b) the debtor is legally released from the liability. The two articles below support my position, and cite several forms of guidance even if the borrower believes it may be able to apply the guidance of IAS 20. Both articles also cover the guidance that borrowers are not required to impute a market rate of interest to government-guaranteed obligations under the guidance of ASC-835-30.

A Grant Thornton article, Accounting for PPP Loans received by businesses, specifically addresses the issues with IAS 20 and the treatment of interest and the timing of extinguishing debt.

A Journal of Accountancy reference article, AICPA issues guidance on accounting for forgivable PPP loans specifically addresses the issues with IAS 20 and the treatment of interest and the timing of extinguishing debt.

PPP loan forgiveness taking longer

Compounding the early write-off decision is the fact that PPP loans, especially larger ones in the US, are taking longer than expected to be forgiven. Some report that their request has been in a queue for months without any notice of if or when the loan will be forgiven. Read more here. To me, this further reinforces the need for diligence—and patience—in order to ensure compliance. 

Summary

In summary, PPP loans should remain a liability on the books with interest recorded until the debt is formally extinguished upon receiving formal confirmation of the legal release of liability. Companies then record it at that time as other income and relieve the debt and interest.

If you have any questions about this or other PPP matters, or finance and accounting matters in general, please don’t hesitate to reach out to me at kimberly@finopsadvisory.com.

All my best,

Kim