Since the primary goal of the PPP loan is employee retention, in order to get forgiveness at least 60% of the loan must be applied to payroll costs with the remaining 40% or less reserved for mortgage interest, rent, and utilities.
Your accounting records should facilitate the application for forgiveness. While it is best to have used a separate bank account for all PPP transactions, it is still possible to use your software's reporting capabilities to assist you in identifying eligible expenses.
General ledger reports can provide detail for rent, utilities and employee benefits paid. Most payroll services are ready to provide reports covering your particular covered period though you may still have to prorate the first and last payroll period in your 8- or 24-week cycle. Of course, spreadsheet skills will be needed to allocate some expenses and summarize information.
Your application for forgiveness will be filed with your loan provider, typically a bank. Many are using a customized portal to have you input information. Be sure to review their requirements as they vary by bank or lending institution. Take the time to reformat your spreadsheet to match their needs as it will speed up the forgiveness process. The bank in turn will work with the SBA to complete the process. Unfortunately, it may be weeks after the application before a final determination is made.
Given the unique nature of the PPP, questions have arisen as to how a borrower should account for the loan in accordance with US Generally Accepted Accounting Principles (GAAP). Although the legal form of the PPP loan is debt, some believe that the loan is, in substance, a government grant.
Following the guidance in ASC 470, a borrower would recognize the entire loan amount as a liability on the balance sheet, with interest accrued and expensed over the term of the loan.
Based on that guidance, the loan would remain recorded as a liability until either of the following criteria are met:
- The entity has been legally released from being the primary obligor under the liability.
- The entity pays the lender and is relieved of its obligation for the liability.
Because a borrower wouldn’t be legally released from being the primary obligor of a PPP loan until forgiveness is actually granted, income from the extinguishment of the loan would only be recognized once the borrower’s application for forgiveness is approved. Any amount forgiven would then be recognized on the statement of activities as debt forgiveness.
If instead the organization chooses to recognize the money as a government grant then in accordance with AU 2018-08, conditional contributions aren’t recognized until the conditions are substantially met or explicitly waived. In cases where conditions are met over time or in stages, contributions should be recognized as qualifying expenses are incurred.
Under this model, the proceeds from a PPP loan would initially be recognized as a refundable advance—a liability—until the conditions for forgiveness are substantially met. The borrower would subsequently recognize contribution revenue as it incurs qualifying PPP expenses, assuming all other conditions are substantially met. Expenditure of the qualifying expenses would trigger the recognizing of income; the organization would not need to wait until actual loan forgiveness to recognize grant income.