On August 28, the American Institute of Certified Public Accountants (AICPA) issued a technical accounting guide that explains how lenders should report forgivable loans made under the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). Here’s what banks and other financial institutions should know before they file their 2020 financial statements.

Background

In late March, Congress passed the $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act, which created the PPP program for small businesses. PPP loans may be subject to 100% forgiveness if certain criteria are met, and the amounts forgiven are excluded from the borrower’s gross income. Under current rules, PPP loans may be used to cover the following expenses:

• Payroll,
• Certain employee health care benefits,
• Mortgage interest,
• Rent,
• Utilities, and
• Interest on any other existing debt.

On June 5, President Trump signed the PPP Flexibility Act, which increases the time for PPP loan recipients to spend the funds and still qualify for forgiveness to 24 weeks (up from eight weeks). Among other changes, the new law also lowers the threshold for funds that must be spent on payroll and employee benefits. Under the modified rules, borrowers must spend at least 60% on payroll costs (down from 75%).

Loan payments

Because of the unique nature of PPP loans, the AICPA received numerous inquiries about how the loans should be accounted for. As a result, the AICPA has issued two guides in the form of Technical Questions and Answers (TQAs):

1. TQA 3200, Long-Term Debt, covers the rules for how borrowers should report PPP loans.
2. TQA 2130, Paycheck Protection Program, explains the rules for lenders who make PPP loans.

The technical guide for lenders (TQA 2130) says that PPP loans should be accounted for as interest-bearing loans (including amortization of loan origination fees) through receipt of payment from borrowers or the SBA. Moreover, any payments received from the borrower or the SBA prior to maturity of the loan (other than required payments of principal and interest) are considered prepayments of the loan. Unamortized loan origination fees should be accounted for under Accounting Standards Codification (ASC) Subtopic 310-20, Receivables — Nonrefundable Fees and Other Costs.

The technical guide explains that the SBA is one of the counterparties to the agreement that will repay the principal and interest on the loan if the borrower meets the conditions for forgiveness. So, payments received from the SBA should be treated similarly to payments received from the borrower.

To forgive or not to forgive?

TQA 2130 also explains accounting requirements during the loan forgiveness process. To qualify for forgiveness, a borrower must complete an application and submit the required documentation to the lending bank. The lender must then issue a decision to the SBA on the loan forgiveness application within 60 days of receiving the application.

If the decision is that the borrower is entitled to forgiveness of some or all of the borrowed funds, the lender must request payment from the SBA at the same time as issuing its decision. Following any review of the loan or loan application, the SBA then remits the forgiveness amount to the bank, plus any interest accrued through the date of payment. This is no later than 90 days after the lender issues its decision to the SBA. After receiving the SBA payment, the lender then notifies the borrower that the loan has been forgiven.

However, if in its review the SBA determines that the borrower wasn’t eligible to receive the PPP loan in the first place, then the loan won’t be eligible for forgiveness. And immediate payment will be required.

What if a borrower doesn’t submit a loan forgiveness application following the PPP requirements after a period of time following the end of the loan forgiveness covered period for the loan? In this situation, the borrower must begin paying principal and interest after that period through the maturity of the loan for the amount that wasn’t forgiven.

For more information

Lenders and borrowers alike have numerous questions regarding PPP loan forgiveness. Your CPA is atop the latest developments and can help with any additional questions that may arise.

 

Sidebar: Reminder for PPP borrowers

On June 10, the American Institute of Certified Public Accountants (AICPA) updated a technical guide that answers how borrowers should account for forgivable loans received under the Paycheck Protection Program (PPP). Specifically, they were unsure whether these arrangements should be treated as loans or grants under U.S. Generally Accepted Accounting Principles.

Technical Questions and Answers 3200, Long-Term Debt, clarifies that PPP loans should be reported as financial liabilities under Accounting Standards Codification (ASC) Topic 470, Debt, and accrue interest according to the interest method in Subtopic 835-30, Interest — Imputation of Interest. This treatment is appropriate whether a borrower expects to pay back the PPP loan or believes it’s a grant that will be forgiven.

For derecognition of the liability, the proceeds from the loan remain as a liability either until the loan is forgiven and the borrower has been “legally released,” or until the borrower pays off the loan. When the loan is forgiven and the borrower gets legal release, the borrower then reduces the liability by the amount forgiven and records a gain on extinguishment.

More rules and restrictions may apply. Contact a CPA for more information about how the accounting rules apply to your business.

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