WOLF & CO Insights Overlooked Factors in PPP Loan Forgiveness Accounting

Overlooked Factors in PPP Loan Forgiveness Accounting

During the height of the pandemic, government-funded financial assistance programs helped many businesses stay afloat. From the Coronavirus Aid, Relief, and Economic Security (CARES) Act to the Main Street Lending Program, businesses all over the country capitalized on these crucial initiatives to help mitigate the negative economic effects of COVID-19. But for many, it’s now time to account for the use of these programs.

For many businesses, the end of their reporting period occurs at the end of the calendar year—meaning financial statements will soon be due and must include the accounting of PPP loans. Businesses must consider the disclosure and classification of their PPP loan to properly inform the users of the financial statements about any significant judgements or assumptions, and subsequent events relating to forgiveness.

The American Institute of Certified Public Accountants (AICPA) provided guidance on the accounting for PPP loans. However, there are other important financial reporting considerations beyond the accounting treatment of the forgiveness of the PPP loan that a borrower must consider as it prepares its December 31, 2020 year-end financial statements, including:

  • Subsequent event considerations
  • Report modifications
  • Balance sheet classification

AICPA Guidance

The AICPA noted two main options for accounting of the PPP loan:

  1. Account for the PPP loan as debt, including accrued interest. The loan would remain recorded as debt, including accrued interest, until either:
    1. The PPP loan is, in part or wholly, forgiven by the U.S. Small Business Association (SBA) and the debtor has been “legally released”
      • Once this criteria is met, the entity would reduce the liability by the amount forgiven and record forgiveness income
    2. The debtor pays off the PPP loan to the SBA
  1. Utilize government grant accounting to account for the PPP loan. If there’s reasonable assurance that the loan will be forgiven, an entity may analogize government grant accounting to account for the PPP loan. This would result in the entity recording the loan initially as a deferred income liability. The entity would reduce the liability with an offset to other income or a reduction to the related expenses, as it recognizes the related cost for which the PPP loan is being used.

Subsequent Event Considerations

If the forgiveness amount is approved by the SBA subsequent to year-end (but prior to the date the financial statements were available to be issued), the entity must consider whether a Type 1 or Type 2 subsequent event has occurred.

Subsequent Event Definition and Reporting
Type 1 Events that provide additional evidence with respect to conditions that existed at the balance sheet date.

•                 The financial statements should be adjusted for any changes in estimates resulting from the use of such evidence

Type 2 Events that provide evidence with respect to conditions that didn’t exist at the date of the balance sheet but arose subsequent to that date.

•                 Doesn’t result in adjustment to the financial statement, but disclosure of this event may be required

If the entity accounts for the PPP loan as a grant (and records some or all of the loan as income or offset to expenses in 2020), but is forgiven by the SBA for a lesser amount in 2021, a Type 1 subsequent event has occurred. In its 2020 financial statements, the borrower should reverse any income that was recorded that wasn’t forgiven and recognize a corresponding amount of debt and related accrued interest.

For a borrower that accounts for the PPP loan as debt, a Type 2 subsequent event has occurred, and the entity should consider disclosure of the forgiveness in the subsequent event footnote.

Report Modifications

Forgiveness of the PPP loan before or after year-end may require an emphasis-of-matter paragraph in the independent auditor’s report.

AU-C Section 706 Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report states, “If the auditor considers it necessary to draw users’ attention to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s professional judgment, is of such importance that it’s fundamental to users’ understanding of the financial statements, the auditor should include an emphasis-of-matter paragraph in the auditor’s report.”

In addition, the auditor may consider it necessary to include an emphasis-of-matter paragraph to highlight an unusually important subsequent event.

Choosing whether to include an emphasis-of-matter paragraph should include considerations pertaining to materiality and the users of the financial statements.

Tax Considerations

The Consolidated Appropriations Act (CAA) 2021 confirms that approved PPP loan forgiveness be treated as a form of tax-exempt income. It also provides that any approved business expenses paid with PPP loan proceeds are fully tax deductible for federal income tax purposes.

In addition, Economic Injury Disaster Loan (EIDL) advances (which were up to $10,000 to each business that applied for an EIDL loan) wouldn’t generate any taxable income, and all the associated expenses paid with the EIDL advances are fully tax deductible.


December 31, 2020 financial statement filings are due soon, and it’s critical to accurately account for your PPP loans in your financial statements. While the AICPA has addressed the accounting impact of the PPP loan at year-end, subsequent event considerations and report modifications are overlooked concepts that can impact the accuracy of your disclosure to the users of the financial statements. Paying attention to these considerations will allow your business to clearly and correctly disclose all relevant considerations regarding PPP loan forgiveness on your year-end financial statements.