Accounting for Paycheck Protection Program Loans

As we move into the second quarter of 2020, financial institutions involved in the Paycheck Protection Program (PPP) through the U.S. Small Business Administration (SBA) are beginning to wrestle with accounting implications from transactions that have occurred in the program. Some of the issues include:

  • SBA loan guarantee
  • Recognition of loan fees
  • Loan accounting

SBA Loan Guarantee

Every loan made under the program is guaranteed by the SBA. The risk of SBA denial of the guarantee should be considered in the evaluation of the adequacy of the institution’s allowance for credit losses for these loans. The PPP generally allows financial institutions to rely on certifications from borrowers in good faith; however, an institution should consider whether there is any risk of loss due to a loss of the guarantee for an error or omission in the underwriting of the loan.

Recognition of Loan Fees

The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes $10 billion of funding to be paid to financial institutions as fees offered by the SBA to offset the costs of originating PPP loans. The fees are a percentage of the loan amount and vary based on the size of the loan. The accounting for these fees and related loan origination costs is guided by Accounting Standards Codification (ASC) 310-20, Receivables - Nonrefundable Fees and Other Costs. ASC 310-20 requires the deferral of the net fees and the accretion into interest income over the life of the related loan using the effective interest method. It is important to note that this guidance requires that the fee be non-refundable. The PPP loan program provides a required refund of the fee in instances where the loan was not appropriately underwritten, or the loan was returned by the borrower shortly after receiving it under the terms of the loan. If an institution determines that a fee is not non-refundable, then the amount should be treated as deferred revenue until it is no longer deemed to be refundable.

The forgiveness of loan balances by the SBA is considered a prepayment, upon receipt of the payment from the SBA, and would allow for the recognition of a ratable portion of the unamortized fee income. The Financial Accounting Standards Board has yet to issue any additional guidance on the accounting for these fees. On May 21, 2020, the SBA issued a procedural notice,[1] which gives guidance as to how lenders can request payment of PPP processing fees. SBA Form 1502 is to be used to request the payment of the fees.

Loan Accounting

PPP loans have a two-year maturity (although legislation increasing the maturity date to five years is awaiting the president’s signature) and a stated interest rate of one percent, and the financial institution should accrue interest on the loan at that rate. Assuming all requirements are met, this amount will be repaid by the SBA if not paid by the borrower. PPP loans will need to be monitored throughout the two-year period to determine when the institution can request the guarantee from the SBA.

[1] SBA Procedural Notice: Paycheck Protection Program Lender Processing Fee Payment and 15-2 Reporting Process. May 21, 2020.

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