CLOSING THE BOOKS IN A COVID-19 WORLD By SCOTT STERN, CPA GRASSI
While so many things in 2020 have been postponed, cancelled or stalled, closing the books at the end of the year is a reality that all business owners will need to face as planned. Yet, this routine practice will look nothing like past years in many ways.
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ACCOUNTING FOR PPP LOANS One of the biggest changes this year will impact borrowers of Paycheck Protection Program (PPP) loans. So much about the PPP is unique from other loans or government relief, particularly its potential for loan forgiveness. There is simply no direct precedent for how a business should present this loan within their financial statements. Fortunately, the American Institute of CPAs (AICPA) recently issued Q&A Section 3200.18 Long-Term Debt, which sets forth accounting method options that for-profit and not-for-profit borrowers can use to report PPP loans. Though its legal form is debt, a PPP loan may be considered a government grant in substance, according to the AICPA. For-profit entities can account for the funds in one of the following ways: y Loan under FASB ASC 470, Debt. Under this method: y Loan funds will accrue interest under FASB ASC 835-30, and additional interest should not be imputed even though the rate is below market. y Derecognize liability under ASC 405-20-40-1 only when the loan is forgiven in whole or part and the borrower is legally released or the borrower pays off the loan. y Once the loan is forgiven in whole or in part and the borrower is legally released, debit Loan Payable and credit Gain on Extinguishment. y Once the borrower pays off the loan, debit Loan Payable and credit the Cash account. y Governmental grant by analogy to IAS 20, Accounting for Government
NOVEMBER/DECEMBER 2020 | NEW JERSEY CPA
Grants and Disclosure of Government Assistance. Under this method: y Do not recognize assistance until the borrower has reasonable assurance (similar to “probable�) that conditions will be met and assistance will be received. y Once the threshold is met, recognize earnings impact over the period in which the business entity incurs the costs the grant is intended to compensate. y When the entity receives the funds, debit the Cash account and credit Deferred Liability. y When the threshold for forgiveness is met, record ratably over the relevant period. Debit Deferred Liability and credit Other Income (or reduction in Compensation expense or other cost to be covered). y Gain contingency by analogy to FASB ASC 450-30. Under this method: y Earnings impact is recognized when all contingencies related to receipt of the assistance are met and the gain is realized or realizable. y When the business entity receives the funds, debit the Cash account and credit Loan Payable. y When all contingencies are met and gain is realized or realizable, debit Loan Payable and credit Gain. y Conditional contribution by analogy to FASB ASC 958-605. Under this method: y Contribution is conditional given the requirements of forgiveness, so earnings should not be recognized until requirements are substantially met or explicitly waived. y Once the business entity receives the
