PPP Loan Accounting Q&A

By Derek Johnson, CPA

My organization has obtained a Paycheck Protection Program (PPP) loan – what can the proceeds be used for in order to be forgivable?

• As of June 5, 2020, the most recent guidance available, at least 60% of PPP funds received must be used for payroll costs, while the remaining amount can be used on interest on mortgages, rent, and utilities. Utilities include electricity, water, gas, sewer, telephone (cell phone and landline), and internet. (Note: the previous guidance stated this threshold as 75%, but subsequent guidance lowered the threshold to 60% retrospective to all previously obtained loans.) Additionally, forgiveness depends on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness is reduced if full-time headcount declines or if salaries decline.

How do I record the receipt of the funds – is it debt or a contribution?

• The PPP loan may either be recorded as a loan or a conditional contribution at the choice of management. If using the debt model, record as a normal loan to be repaid including any interest owed on the debt. This loan would remain as a liability until forgiveness is received and at that time would be recognized as revenue. If contribution model is selected, record initially as a refundable advance and treat the loan as a conditional government contribution. (Note: the recently effective ASC 606 Revenue Recognition standard is not applicable in this instance, as these loans do not meet the scope of “contracts with customers” as defined in the new standard.) A conditional contribution should not be recognized as revenue until all conditions are substantially met. See below for a common barrier to be able to recognize the revenue. Therefore, upon receipt of the funds and until conditions are met or explicitly waived by the donor, the organization should record the funds as follows:
  • Debit: Cash $XXX
    • Credit: Debt/Refundable Advance $XXX

How do I record and separately identify qualifying expenses?

• Qualifying expenses should be tracked as normal; however, it is important for the organization to separately identify these expenses. Using separate accounts or account coding, or separately tracking these items outside of the accounting software are good methods to making these expenses easily identifiable. Borrowers must maintain appropriate records during the measurement period to be able to submit to lenders for forgiveness.

How do I record revenue once the conditions of the loan are substantially met?

• Industry experts have not come to a consensus as to when to recognize revenue from the PPP loan. However, there is a barrier to record the revenue if employment status has been reduced (or is expected to be reduced) for any previously full-time employees. Otherwise, it can generally be assumed that revenue can be recognized as qualifying expenses are incurred. Regardless of when it is recorded, the entry is the same:
  • Debit: Debt/Refundable Advance $XXX
    • Credit: Contribution Revenue $XXX

Additionally, if the organization estimates that a certain portion of the loan will not be forgivable, interest should be accrued in the amount estimated to be repaid.

Derek Johnson, CPA | Supervisor
DJohnson@MHCScpa.com