The PPP: Oh, Where Should it Be?

Recipient Organization Accounting for PPP Loans

With year-ends on the horizon, many organizations are focusing on annual reporting considerations. For many this means determining how to account for the Small Business Administration (SBA) Payroll Protection Program (PPP) loans received from the federal government in 2020 for COVID-19 related relief. 

Many recipients plan to apply for debt forgiveness of their loan, though many of these organizations may not receive a formal response to their application, either approving or denying forgiveness, by the end of 2020. This presents a challenge of how to account for the loan as of year-end 2020. 

Organizations that applied for, but have not received formal loan forgiveness as of year-end 2020 must determine whether to present the loan as a liability under ASC 470, Debt or as income under ASC 958-605, Not for Profit Entities: Revenue Recognition. The NAIC has not published specific guidance. In the absence of specific statutory guidance for PPP loans, recipients should follow SSAP 15 paragraph 11, which states that a reporting entity shall derecognize a liability if, and only if, it has been extinguished. A liability is extinguished through payment or being legally released from being the primary obligor. As the NAIC rejected ASC 958-605, SSAP 15 is the only option for statutory reporting entities. Organizations that prepare statutory and GAAP financial statements may consider consistent reporting standards for both financial statements.


Organizations electing to record the PPP loan as a liability should also record accrued interest upon issuance of the debt, regardless of the intent to apply for forgiveness. Many organizations are expected to elect this option due to its “safe harbor” designation by the Financial Accounting Standards Board (FASB). Additionally, it is appropriate to use debt accounting as the PPP loan is debt. If the SBA, not the bank, forgives any amount of the loan through a legal release, the liability would be derecognized and a gain on loan extinguishment recognized.  This option may result in a disconnect when an entity reports PPP-funded expenses in 2020 and PPP loan forgiveness income in 2021. Organizations should consider how this may impact operational measures used by key decision makers, debt covenants and taxes. 

Government Grant

The second option is to treat the PPP loan as a government grant and account for it as a conditional contribution under ASC 958-605.  Although geared towards Not-for-Profit organizations, for-profit organizations are not precluded from applying this guidance in their GAAP financial statements. Conditional contribution is defined as “a contribution that contains a donor-imposed condition;” in this case the requirements for loan forgiveness are the conditions. Conditional contributions are recorded as a refundable advance until conditions are satisfied, including accrued interest and may be recognized once the donor condition(s) is(are) “substantially met” or “explicitly waived by the donor.”  

Accounting for a PPP loan under this approach necessitates an evaluation of whether or to what extent the loan forgiveness requirements were substantially met as of year-end.  If deemed to be substantially met, the loan is recognized as income in the period the conditions were substantially met. However, it is possible that certain loan forgiveness conditions may be substantially met while others do not meet that threshold as of the reporting date. In this scenario, only a prorated amount of the PPP loan attributable to the conditions substantially met are eligible to be recognized as income, with the remainder recorded as a refundable advance. 

Other Considerations

The Internal Revenue Service (IRS) determined that PPP loans are not taxable income per IRS Notice 2020-32. Likewise, expenses that support loan forgiveness, such as payroll and rent, are not deductible. Differences in the timing of when eligible expenses are incurred and loan forgiveness is recorded can present additional complications when accounting for current and deferred income taxes. Additional guidance from the IRS may be forthcoming that could impact financial statements and returns.

Final Thoughts

Each organization has unique considerations to weigh when determining which accounting approach to elect for its PPP loan. Whichever option is selected, the organization needs to support the determination, the basis for certifying the need for the loan and provide support for qualifying expenses. Additionally, organizations must disclose the accounting policy elected to record the PPP loan. 

The FASB and the IRS may release additional guidance before year-end to provide further clarification and support on PPP accounting issues. We are committed to keeping you up-to-date. Please check our website for subsequent developments.

If you have any questions about this, contact the Johnson Lambert team

This communication is intended to provide general information on COVID-19-related measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As COVID-19-related efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.

Amy Knell
Amy Knell | Senior Manager