AICPA Issues Guidance for PPP Lenders and Effective Interest Rates

The American Institute of Certified Public Accountants (AICPA) issued Technical Question and Answers (TQAs) to assist depository institutions, credit card companies, broker-dealers, insurance companies, and other lenders appropriately account for loans they distribute under the Paycheck Protection Program (PPP):

  • TQA 2130.42, Classification of Advances Under the Paycheck Protection Program
  • TQA 2130.43, Consideration of the SBA Guarantee Under the Paycheck Protection Program
  • TQA 2130.44, Accounting for the Loan Origination Fee Received From the SBA
  • TQA 2130.45, Accounting for Loan Repayment or Forgiveness by the SBA

The AICPA also issued TQA 2130.41, Determination of the Effective Interest Rate, to assist lenders with calculating the effective interest rate for loan restructurings that result in periods with reduced payments.

Accounting for PPP Loans

Given the unique nature of the PPP, lenders have ongoing questions about how to report on their arrangements and account for these types of loans in accordance with US Generally Accepted Accounting Principles (GAAP).

Below, we address accounting and reporting considerations for lenders that distribute loans under the PPP.

Classification of Advances

In accordance with TQA 2130.42, an advance under the PPP should be accounted for as a loan. The advance is legally a loan with a stated principal, interest, and maturity date. The lender is also expected to collect amounts due from either the borrower or the Small Business Administration (SBA) as guarantor.

SBA Guarantee

PPP loans are distributed through SBA-approved lenders and are guaranteed by the SBA.

TQA 2130.43 discusses the accounting for SBA guarantees, in consideration with the following facts:

  • The SBA guarantee exists at the inception of the loan and throughout its life, and it wasn’t entered into separately and apart from the loan.
  • If the loan is transferred, the guarantee transfers with it.
  • The arrangement doesn’t contemplate the loan existing without the guarantee, unless it’s ultimately determined the lender violated an obligation under the agreement.
  • The guarantee wasn’t entered into in conjunction with another transaction and isn’t legally detachable.

The SBA guarantee should be accounted for as an embedded guarantee and considered when estimating credit losses on the loan under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 326-20-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, or when determining the allowance for credit losses under ASC 450, Contingencies, or ASC 310, Receivables, if the guidance in ASC 326 hasn’t been adopted.

Origination Fees

The SBA, in effect, pays any loan origination fee ordinarily paid by the borrower. Upon loan funding, the origination fee should be accounted for as a nonrefundable loan origination fee under ASC 310-20, Receivables—Nonrefundable Fees and Other Costs. Accordingly, it needs to be deferred as an offset against loan-origination costs and amortized over the life of the loan.

Clawback Provisions

An origination fee may be subject to clawback provisions after full disbursement of a PPP loan if one of the following occurs:

  • The PPP loan is cancelled or voluntarily terminated and repaid after disbursement but before the borrower certification safe-harbor date.
  • The PPP loan is cancelled, terminated, or repaid after disbursement—and after the borrower certification safe-harbor date—because the SBA conducted a loan review and determined the borrower was ineligible for a PPP loan.
  • The lender hasn’t fulfilled its obligations under the PPP regulations.

Within TQA 2130.44, the AICPA staff stated these clawback provisions are distinguished from refund provisions because they’re designed to operate similarly to cancellation or penalty provisions when one of the counterparties to the arrangement violates a representation, warranty, or obligation under the agreement. As such, the AICPA staff believes the clawback provisions don’t cause the fees to be considered refundable. As a result, the fees are subject to ASC 310-20.

Lenders will also want to consider the guidance in ASC 450, Contingencies, and establish a loss contingency when it’s probable events or conditions precedent to a loss have occurred and the resulting amount of the loss is estimable.

Payments Prior to Loan Maturity

Under TQA 2130.45, payments received from the borrower or the SBA—other than required principal and interest payments—prior to the loan’s maturity should be accounted for as a prepayment. Unamortized loan origination fees should be accounted for in accordance with ASC 310- 20.

The SBA is considered one of the counterparties to the loan agreement, and as such, payments received from the SBA should be treated similar to payments received from the borrower.

Effective Interest Rate

Due to the COVID-19 pandemic, lenders may restructure loans to include a period of reduced payments.

The effective interest rate on a restructured loan that isn’t a troubled debt restructuring, or required to be accounted for as a new loan, should be determined in accordance with the interest method under ASC 310-20; this requires a constant effective interest rate.

The effective interest rate on a restructured loan is the rate that equates the new contractual cash flows over the restructured contractual term with the amortized cost basis of the loan at the restructuring date.

To record a constant effective interest rate, the difference between the periodic interest income and the stated interest on the outstanding principal amount of the receivable is adjusted through periodic amortization.

Periodic Amortization Limits

If the loan’s stated interest rate increases during the term of the loan, ASC 310-20 limits the amount of periodic amortization that can be recognized to an amount that wouldn’t cause the lender’s net investment in the loan to exceed the amount for which the borrower could settle the obligation.

Policy Election

During the board meeting held on April 8, 2020, the FASB staff discussed the accounting for loan terms being restructured in response to the COVID-19 pandemic.

The FASB staff noted a lender may make an entity-wide accounting policy election whether to apply the guidance in ASC 310-20 that limits the amount of periodic amortization that can be recognized for qualifying restructures.

To apply the policy election, a qualifying restructure must meet both of the following criteria:

  • Loan terms are restructured in response to the COVID-19 pandemic to include a period with reduced payments.
  • Restructuring isn’t a troubled debt restructuring or accounted for as a new loan.

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For more information about determining effective interest rates and understanding accounting considerations for loans distributed under the PPP, contact your Moss Adams professional.

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