Whether your company elected the 24-week (168 day) period or the 8-week (56 day) period now is the time to be thinking and preparing for the loan accounting and subsequent forgiveness reporting.
PPP Loan Accounting
By now most Companies should have recorded the loans on their financial statements. What’s next? In June 2020, the AICPA worked with the FASB and issued guidance on how companies should account for the loan after the initial recognition. The group concluded the loan can either be accounted for as debt under ASC 470 or as a government grant under IAS 20. Many of our clients have used the grant method to match the forgiven accruals to the period “earned” as they qualified.
Debt under ASC 470
An entity accounting for the PPP loan under ASC 470 would initially record the cash inflow from the PPP loan as a financial liability. The company would continue to record the proceeds from the loan as a liability until either (1) the loan is partly or wholly forgiven, and the debtor has been legally released or (2) the debtor pays off the loan. The liability is reduced by the amount forgiven and a gain on extinguishment is recorded once the loan is partly or wholly forgiven and legal release is received.
Government Grant under IAS 20
Under IAS 20 if an entity expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may account for the loan as a government grant. An entity accounting for the loan under this method would not be able to recognize government assistance until there is reasonable assurance that any conditions attached to the assistance will be met and the loan forgiven. Once there is reasonable assurance the conditions have been met the gain and relief of the liability would be recorded as the company recognizes the qualified expenses which include payroll and related benefits, rent and utilities.
PPP Tax Treatment
The CARES Act (P.L. 116-136), passed on March 27, 2020, held that debt cancellation income which would otherwise be included gross income shall be excluded for purposes of certain paycheck protection program loans. Subsequently, the IRS released Notice 2020-32, which denies tax deductions for amounts paid under the PPP which were forgiven, citing this treatment as being necessary to prevent taxpayers from receiving double benefit. On August 4, 2020, the AICPA and 170 other organizations issued a letter to congress to request a technical correction to the IRS notice, citing that congressional intention was inconsistent with IRS treatment, urging them to allow deductions for expenses paid with PPP loan proceeds. The complete letter may be found here: https://s-corp.org/wp-content/uploads/2020/08/Main-Street-Loan-Forgiveness-8-4-20-Final-1-1.pdf
Since the letter was just sent to congress on August 4th, we expect it will be weeks or months before they respond or issue a technical correction. For the time being, we recommend that taxpayers plan on a worst-case scenario as they plan for taxes, and do not plan on being able to take these deductions. Please subscribe to our newsletter for periodic updates of this and other issues.
PPP Loan Forgiveness
On August 4, 2020 the SBA finally released a series of FAQs covering loan forgiveness. The FAQs cover several commonly asked questions in the industry such as payroll periods, eligible utilities, payroll, and utilities costs incurred prior to the covered period but paid in the covered period and many more. They can be found here: https://www.sba.gov/sites/default/files/2020-08/PPP Loan Forgiveness FAQs 8-4-20.pdf
Regardless which covered period you chose now is the time to start preparing for forgiveness if you have not already. Companies should be keeping detailed records of payroll expenses, rent and utilities paid out under the program.
Given the state of the industry we have also received several questions about the economic need factor to qualify for the loan. Although we don’t believe there is a big concern, we have been advising companies to document the hardship they were experiencing in late March 2020 and April 2020 when they applied for the loan as support for their PPP loan application. These would include significant margin calls, hedging losses, investor issues, servicing values evaporating and lack of additional funding in the market.
About the Author
Since 2004, Dustin has been practicing public accounting with both national and regional accounting firms focused on providing assurance and consulting services to both public and private companies. Beginning in 2010, he focused on the Mortgage Banking industry and has become know as an industry expert.
Dustin attends and regularly speaks at various mortgage industry conferences and webinars focused on mortgage accounting issues hosted by the Mortgage Bankers Association, Texas Mortgage Bankers Association (TMBA), and various industry partners. He currently serves as a board member and a member of the executive committee of the TMBA as well as serving as a member or chair of various committees.
Dustin’s focus on mortgage company accounting issues helps him make complex financial information more accessible to his clients and empowering them to make informed decisions.
CWDL is an accounting and consulting firm servicing clients across the country. The corporate office is in San Diego with additional offices in Phoenix, AZ and Austin, TX. Our national practice specializes in the mortgage industry by providing audit, tax, accounting, and consulting services. Our Managing Partner, Mark Wilson, CPA founded an independent mortgage bank and served as a CFO of a couple mortgage companies during his career. This experience provides unique perspectives you don’t typically get from other firms. In addition, our teams are led by mortgage industry professionals from prior controllers/CFOs to Partners involved in the industry for many years. We provide a unique “client side” perspective that drives value to our clients.
For any questions on or more information, please contact Dustin Pfluger, Mortgage Banking Partner at [email protected].