As organizations throughout our nation continue to see the economic impacts of the Coronavirus (COVID-19) pandemic, the focus of the leaders of these organizations has rightly been on finding solutions to help weather the storm.
The major relief program passed by Congress to help meet these needs is the Paycheck Protection Program (PPP), which designated hundreds of billions of dollars in the form of potentially forgivable loans to eligible organizations. As these organizations begin to receive PPP funds, attention has begun to shift towards the loan forgiveness process and how to account for these loans.
While there is no COVID-19–specific guidance issued yet by the Financial Accounting Standards Board, there is current guidance regarding the extinguishment of debt that we believe helps guide accounting for these loans. Here, we’ve provided a summary of the accounting impact associated with PPP loans and the things that businesses should know.
Balance Sheet Impact
Current guidance requires debt to remain as a liability until the borrower is no longer legally obligated to repay the debt. There are certain time and use requirements for borrowers to be able to apply for forgiveness. Therefore, derecognition should not occur until formal forgiveness is approved.
Eligible costs to obtain the loan (debt issuance costs) should be capitalized and presented as a reduction in debt and amortized over the term of the loan. While interest payments are deferred and will potentially be forgiven, interest should be accrued at the stated rate each month.
Income Statement Impact
The expenses connected with the aforementioned interest accrual and amortization of debt issuance costs should be presented as interest expense on the organization’s income statement. Upon legal forgiveness of the loan, a gain from debt extinguishment should be recorded for the sum of the carrying value of the debt (outstanding loan amount less unamortized debt issuance costs) and accrued interest (unless it must be paid) at the time of forgiveness.
Additionally, expenses paid using PPP funds should continue to be recorded as payroll, rent or other expenses as they would normally be recorded.
In addition to the quantitative impacts noted above, other matters should be taken into consideration regarding the receipt of PPP funds.
There may be certain covenant requirements as a result of other debt that the company holds with financial institutions. There also may be other contractual agreements this could impact, such as the calculation of management bonuses or contingent consideration related to a prior business combination. While this will vary on a case–by–case basis, we recommend that organizations think through any potential effects from the PPP funds and address as necessary.
Connect with an Advisor Concerning PPP Loan Accounting
Learn more about the Paycheck Protection Program here. Remember, as things change quickly, the best way to gain up-to-date and specific information for your business is to connect with an advisor.
If you have questions about how this impacts you, contact your Warren Averett advisor or have one of our team members reach out to you.
This article was written on May 1, 2020 and it reflects our views at the time of the writing and should be used as reference only. We recommend that you talk to your Warren Averett advisor, or another business advisor, for the most current information or for guidance specific to your organization.