In the wake of the coronavirus (COVID-19) pandemic emerged the Coronavirus Aid, Relief and Economic Security (CARES) Act, which included the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). The SBA incentivized banks to extend PPP loans to those small businesses that qualified by paying a percentage to the banks for the lenders’ fees for processing the PPP loans.
Over 5.2 million loans were approved, totaling more than $525 billion. The deadline to apply for a PPP loan has passed and companies are beginning to apply to their lenders for forgiveness. Financial reporting periods for business are here and the PPP loan must be presented and disclosed properly. There are issues affecting both banks and businesses, regarding the compliance of loan covenants.
Loan forgiveness
Banks that receive PPP loan forgiveness applications must determine if the company has met the proper requirements for forgiveness within 60 days of submission. If the bank approves the forgiveness, they must then submit to the SBA for approval of the forgiveness, which could take up to 90 days. If the SBA approves the forgiveness, then the SBA will pay the bank back for the loan and the company will be relieved of their debt to the bank. If the bank and/or the SBA does not approve the forgiveness, then the company will still owe all or a portion of the loan based on the terms of the loan.
Forgiveness of a PPP loan all depends on if the company complied with the covenants of the loan to ensure the funds were used in accordance with what was intended. Covenants include using 60% of the loan on payroll costs over an 8- or 24-week covered period ending prior to December 31, 2020, among others.
Uncertainty in guidance
There has been uncertainty surrounding presentation and disclosure requirements for financial statements for both for-profit companies and not-for-profit organizations that received a PPP loan. This is affecting many entities with reporting periods that have passed and are coming in the near future.
The question is whether the PPP loan should be recognized as a liability or as revenue at year-end, given the timing of whether the PPP loan has been forgiven. Due to a lack of specific guidance in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) for a program as unique as the PPP, the AICPA developed the Technical Questions and Answer (TQA) 3200.18. The TQA provides multiple models in which to account for the PPP loan in the financial statements.
Presentation and disclosure
The most conservative option to present and disclose the PPP loan in the financial statements is FASB ASC 470, Debt, in which the PPP loan would be presented on the balance sheet as a liability and disclosed as a loan in the footnotes with the proper terms. The loan will not be recognized as revenue until it is forgiven by the SBA. Interest would also be accrued in accordance with the interest method under FASB ASC 835-30.
There are multiple other options that can be used in which a company can recognize revenue prior to the loan being forgiven. Their options include: FASB ASC 958-605, Not-for-Profit Entities: Revenue Recognition, FASB ASC 450-30, Contingencies: Gain Contingencies Model, and International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance. The preferred method for not-for profit entities is FASB ASC 470 and FASB ASC 958-605. The entity must decide which method best fits its specific situation.
The Payroll Protection Program has been a savior for many businesses during this trying time, however it is not without flaws. Constant changes and lack of authoritative guidance have created uncertainty for banks and companies alike. The PPP loans were originally designed to be forgiven by the banks and the SBA if the covenants were complied with; however, this has become a long process. It also appears that those entities who received larger loans have a more scrutinized process of loan forgiveness as opposed to those that receive a smaller loan amount.
There is no right or wrong answer as to what guidance must be used in order to present and disclose the PPP loan in an entity’s financial statements; it is based on the specific entity’s situation and professional judgment should be used. These issues are of the utmost importance pertaining to how banks handle loan forgiveness and covenants, as well as how companies comply with financial statement presentation and disclosure.
Need help navigating PPP forgiveness? Reach out to Magone & Company or call (973) 301-2300.