How financial institutions should handle accounting for PPP loan fees
By Nick Ansley, Mary Coates and Meghan Gardner
As part of the CARES Act, the U.S. Treasury made available $349 billion in funds to small business employers through the Paycheck Protection Program.
Lenders originating loans under the PPP receive processing fees that will be paid by the Small Business Administration (SBA). Many financial institutions have generated substantial loan volume under the PPP, resulting in significant processing fees. The following addresses frequently asked questions related to properly accounting for PPP fees:
Q: Should processing fees be recognized as income at loan origination or deferred over the life of the loan?
A: According to ASC 310-20, loan origination fees should be capitalized, effectively reducing the net loan balance, rather than being recognized as income at origination. After initial recognition, the capitalized fee would be accreted into interest income using the interest method.
Q: In considering the ‘life of the loan’ should prepayments be considered?
A: ASC 310-20 allows an entity to elect the prepayment method in accounting for capitalized loan fees assuming the prepayments are probable and the timing can be reasonably estimated. If the prepayment method is not elected, entities must account for prepayments as they occur. It is our interpretation that principal amounts forgiven by the SBA would represent loan prepayments.
Q: Should direct costs associated with originating PPP loans also be considered?
A: ASC 310-20 indicates that direct loan origination costs should be offset against loan origination fees and that the net amount should be deferred. Typically, the most significant portion of origination costs relates to personnel costs from individuals involved in the loan origination process. Institutions may need to complete a cost analysis to estimate the time and expense associated with originating PPP loans.
Q: How should we account for PPP fees that have been earned, but not yet received from the SBA?
A: Estimated origination fee income should be capitalized at loan origination. As SBA fees are generally not disbursed immediately, this may require establishing a receivable balance as part of the entry to capitalize the loan fee against the loan balance. The SBA has established a defined fee structure for lenders based on the amount of the originated loan, which can be utilized to estimate the fee amount.
If you have questions on the above guidance, or would like to discuss how to best practically implement this guidance, please reach out to your Wipfli relationship executive.
Q: I have never recorded deferred loan fees or costs in the past. Do I have to now?
A: We are aware that many institutions have determined that recording of ASC 310-20 is not material and have not recorded the associated asset or liability. The determination of whether this needs to be recorded is dependent upon the institution and the users of its financial statements, which includes regulators as well as shareholders. Other considerations that should be considered in making that determination include whether compensation plans may be impacted, the effect on capital, and overall shareholder value, especially where an institution or its parent is either setting a stock valuation price visible to its shareholders or transacting in its own stock.
Q: How do I report loan fees for tax returns?
When it comes to tax reporting purposes, loan origination fees are generally treated as Original Issue Discount (OID) and recognized as ordinary income over the life of the loan as an adjustment to yield. Generally, the constant-yield method is for tax reporting purposes unless a de minimis exception applies. Unlike the book accounting, tax reporting does not offset origination fees against origination costs; instead, origination costs are generally currently deductible for tax purposes.
Given that PPP loans are potentially forgivable, there may be a question as to what the terms of these loans are. Ideally, as the loans are forgiven, they could be marked as “paid in full” as of that date. In the absence of further guidance, the best practice is to defer the loan fees as usual, accrete them over the expected life of the loan, and once the loan is forgiven, recognize the remainder of the loan fees into taxable income.
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