Timing of PPP Loan Forgiveness and Impact on Bonding

Many borrowers of the Paycheck Protection Program (PPP) loan are currently submitting loan forgiveness applications. While construction and real estate (CRE) companies can greatly benefit from the financial offerings that Congress enacts, aspects of these programs may lead to challenges and confusion. The methods for recording the PPP loans and loan forgiveness, for example, come with a great deal of complexities, as there is uncertainty related to intent, qualifications and financial reporting.

We spoke with surety agents across the country to learn more about how they are assisting contractors through this time and to offer our readers a clearer understanding of the accounting methods as they relate to loan forgiveness.

Sureties – Flexibility and Transparency

COVID-19 has played a major factor in the financial performance of contractors, and surety agents recognize that this year is unlike any other. No business could have proactively planned to address the negative economic impacts of the pandemic. With that in mind, surety agents are taking a more flexible view with their accounting models when considering bonding capacity. In these uncertain and unprecedented times, surety agents are enacting a transparent approach, in which open dialogue is a dynamic part of their relationship with their customers.

Government Grant Model

There is no specific authoritative guidance from generally accepted accounting principles (GAAP) on the accounting for forgivable loans. However, there are four GAAP options that should be considered. Many advisors recommend contractors consider utilizing the government grant model (IAS 20) as their accounting method for their PPP loan. Under this model, government grants are recognized in the statement of income on a systematic basis, consistent with the provisions of IAS 20.

As a borrower, a contractor would recognize the PPP loan as Deferred Income (long-term liability) upon receipt of the PPP loan. The PPP loan forgiveness is ultimately not recognized until there is reasonable assurance that the entity will comply with conditions and forgiveness will be granted. Therefore, this method can allow for recognition of the forgiveness prior to final approval by the SBA, as long as the “reasonable assurance” standard is met.

Once reasonable assurance is met, the PPP loan forgiveness income can be recognized on a systematic basis over the periods in which the entity recognizes the related expenses for which the grants are intended to compensate with a corresponding offset to deferred income.

IAS 20 generally recognizes government grants in the statement of income either on a “gross” or “net” basis. A gross basis recognizes the forgiven portion of the loan amount as “other income” in the statement of income. A net basis recognizes the forgiven portion of the loan amount as an offset against the related eligible expenses.

Timing of Loan Forgiveness

At the introduction of the PPP loans, surety agents encouraged many of their construction clients to take advantage of the financial offering to safeguard their companies’ long-term success. Now that we are at a point of potential loan forgiveness, contractors are analyzing their options. The surety agents we connected with anticipate that PPP loan forgiveness will be determined either by year-end or by the time 2020 financial statements are issued. In this event, surety agents expect any forgiveness that occurs after December 31, 2020 to be documented in the footnotes of financial statements.

Whichever way it does go, sureties will build the forgiveness and corresponding equity increase into their analysis for the more accurate results.

Additional Considerations

New Insurance Policies to Protect Liabilities

Due to the longevity of the pandemic and its continued impact on businesses, insurance brokers are developing new opportunities for businesses to protect themselves from risks. There has recently been activity from PPP loans in the form of new insurance policies to protect borrowers’ liabilities that were created through the program. Ask your surety agent to learn more about this offering.

Lines of Credit

While many contractors have available lines of credit, agents do not anticipate that those will be used to fund losses due to the pandemic, as lines of credit are not often used to cover operating expenses. Thus, the availability of a line of credit for a contractor is generally not considered by sureties to constitute another source of capital that would have precluded a contractor from being eligible for the PPP loan program.

Other Accounting Methods

For contractors that do not wish or cannot use the government grant model as their accounting method, there are three other options. The debt (liability) model (ASC 470) recognizes a PPP loan as a Note Payable; the contributions model (analogize to FASB ASC 958-605) recognizes a PPP loan as a Refundable Advance; and the gain contingency model (ASC 450-30) recognizes a PPP loan as a Note Payable.

PPP loans and loan forgiveness are new to all of us—still, our team of tax and accounting experts is equipped to support your construction and real estate business through these challenges now and in the future. Please contact our team to speak with a professional.

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