PPP: Financial Reporting for Lenders (and Other Observations)

5/26/2020
PPP: Financial Reporting for Lenders (and Other Observations)

Updated 6/5/2020

The U.S. Department of the Treasury and the Small Business Administration (SBA) have been busy issuing guidance on the Paycheck Protection Program (PPP), all of which is housed on the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) assistance for small businesses section of the Treasury’s website. Late last week, the SBA and Treasury issued two interim final rules (IFRs) and the SBA issued a procedural notice to collectively address loan forgiveness and the processing fees.

In case you are wondering, an interim final rule is used when an agency finds that it has good cause to issue a final rule without first publishing a proposed rule. This type of rule becomes effective immediately upon publication in the Federal Register. The agency accepts comments and will alter the rule if warranted.

We will strive to keep you updated as events unfold.

Loan forgiveness

On May 22, the SBA and Treasury issued an IFR, “Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Loan Forgiveness,” to help borrowers with loan forgiveness applications, to help lenders make loan forgiveness decisions, and to inform borrowers and lenders of the SBA’s process for reviewing PPP loan applications and loan forgiveness applications. The goal is to provide a high degree of certainty to borrowers so they will be able to take immediate steps to maximize loan forgiveness amounts (for example, either rehiring employees or not laying off employees during the covered period).

This rule, which is effective when filed in the Federal Register, allows for immediate implementation of the forgiveness component of the PPP. Comments are due up to 30 days after publication in the Federal Register.

For the general process to obtain forgiveness, the IFR states:

To receive loan forgiveness, a borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to its lender (or the lender servicing its loan). As a general matter, the lender will review the application and make a decision regarding loan forgiveness. The lender has 60 days from receipt of a complete application to issue a decision to SBA. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for under the statute and applicable regulations, the lender must request payment from SBA at the time the lender issues its decision to SBA. SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to SBA.

 

If SBA determines in the course of its review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application), the loan will not be eligible for loan forgiveness. The lender is responsible for notifying the borrower of the forgiveness amount.

The IFR also answers these questions:

Payroll Costs Eligible for Loan Forgiveness

  1. When must payroll costs be incurred and/or paid to be eligible for forgiveness?
  2. Are salary, wages, or commission payments to furloughed employees; bonuses; or hazard pay during the covered period eligible for loan forgiveness?
  3. Are there caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation?

Nonpayroll Costs Eligible for Loan Forgiveness

  1. When must nonpayroll costs be incurred and/or paid to be eligible for forgiveness?
  2. Are advance payments of interest on mortgage obligations eligible for loan forgiveness?

Reductions to Loan Forgiveness Amount

  1. Will a borrower’s loan forgiveness amount be reduced if the borrower laid-off or reduced the hours of an employee, then offered to rehire the same employee for the same salary and same number of hours, or restore the reduction in hours, but the employee declined the offer?
  2. What effect does a reduction in a borrower’s number of full-time equivalent (FTE) employees have on the loan forgiveness amount?
  3. What does “full-time equivalent employee” mean?
  4. How should a borrower calculate its number of full-time equivalent (FTE) employees?
  5. What effect does a borrower’s reduction in employees’ salary or wages have on the loan forgiveness amount?
  6. How should borrowers seeking loan forgiveness account for the reduction based on a reduction in the number of employees (Section 1106(d)(2)) relative to the reduction relating to salary and wages (Section 1106(d)(3))?
  7. If a borrower restores reductions made to employee salaries and wages or FTE employees by not later than June 30, 2020, can the borrower avoid a reduction in its loan forgiveness amount?
  8. Will a borrower’s loan forgiveness amount be reduced if an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction?

Documentation Requirements
What must borrowers submit for forgiveness of their PPP loans? 

SBA loan review procedures and related borrower and lender responsibilities

Also on May 22, the SBA issued a separate interim final rule, “Business Loan Program Temporary Changes; Paycheck Protection Program – SBA Loan Review Procedures and Related Borrower and Lender Responsibilities,” which describes its procedures for reviewing PPP loan applications and loan forgiveness applications.

Consistent with the other IFR, the objective is to provide a high degree of certainty to PPP borrowers to allow them to take immediate steps to maximize their loan forgiveness amounts. As part of the overview, the IFR states:

In light of the structure of the PPP program established by the CARES Act and the PPP Interim Final Rules, in which loans and loan forgiveness are provided based on the borrower’s certifications and documentation provided by the borrower, the Administrator, in consultation with the Secretary of the Treasury (Secretary), has determined that it is appropriate to adopt additional procedures and criteria through which SBA will review whether an action by the borrower has resulted in its receipt of a PPP loan that did not meet program requirements. SBA’s review of borrower certifications and representations regarding the borrower’s eligibility for a PPP loan and loan forgiveness, and the borrower’s use of PPP loan proceeds, is essential to ensure that PPP loans are directed to the entities Congress intended, and that PPP loan proceeds are used for the purposes Congress required, including the CARES Act’s central purpose of keeping workers paid and employed.

For borrowers, the IFR also covers the following:

SBA Reviews of Individual PPP Loans

  1. Will SBA review individual PPP loans?
  2. What borrower representations and statements will SBA review?
  3. When will SBA undertake a loan review?
  4. Will I have the opportunity to respond to SBA’s questions in a review?
  5. If SBA determines that a borrower is ineligible for a PPP loan, can the loan be forgiven?
  6. May a borrower appeal SBA’s determination that the borrower is ineligible for a PPP loan or ineligible for the loan amount or the loan forgiveness amount claimed by the borrower? 

For lenders, the IFR includes:

The Loan Forgiveness Process for Lenders

  1. What should a lender review? 

The response includes: 

Providing an accurate calculation of the loan forgiveness amount is the responsibility of the borrower, and the borrower attests to the accuracy of its reported information and calculations on the Loan Forgiveness Application. Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. By contrast, if payroll costs are not documented with such recognized sources, more extensive review of calculations and data would be appropriate. The borrower shall not receive forgiveness without submitting all required documentation to the lender.

 

As the First Interim Final Rule [FN3] indicates, lenders may rely on borrower representations. If the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue. As stated in paragraph III.3.c of the First Interim Final Rule, the lender does not need to independently verify the borrower’s reported information if the borrower submits documentation supporting its request for loan forgiveness and attests that it accurately verified the payments for eligible costs.

FN3: 85 FR 20811, 20815-20816 (April 15, 2020)

b. What is the timeline for the lender’s decision on a loan forgiveness application?

The response includes: 

The lender must issue a decision to SBA on a loan forgiveness application not later than 60 days after receipt of a complete loan forgiveness application from the borrower.

 

The lender must confirm that the information provided by the lender to SBA accurately reflects lender’s records for the loan, and that the lender has made its decision in accordance with the requirements set forth in 2.a. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for under the statute and applicable regulations, the lender must request payment from SBA at the time the lender issues its decision to SBA. SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to SBA.

c. What should a lender do if it receives notice that SBA is reviewing a loan? 

The response includes: 

SBA may begin a review of any PPP loan of any size at any time in SBA’s discretion. If SBA undertakes such a review, SBA will notify the lender in writing and the lender must notify the borrower in writing within five business days of receipt.

The IFR also addresses “lender fees.” That information is included in the following “Processing fees” section.

This rule, which is effective when filed in the Federal Register, allows for immediate implementation of the forgiveness component of the PPP. Comments are due up to 30 days after publication in the Federal Register.

Processing fees

When the PPP was unveiled, the financial reporting for recognizing the lender fees seemed relatively straightforward. As more unfolded, questions arose based on the following developments.

When is the lender entitled to the fee?

Understandably, there was a dash to apply for the funds. Upon further consideration, some recipients decided to return the proceeds. In its frequently asked questions, the SBA provided guidance for borrowers with adequate sources of liquidity, which in turn called into question whether the lender would be entitled to the fee:

  • FAQ 31 addressed permitting large borrowers to return the proceeds to the lender by May 7 to “be deemed by SBA to have made the required certification in good faith” (added April 23).
  • FAQ 37 addressed the same for private companies (added April 28).
  • FAQ 43 extended the repayment safe harbor to May 14 (added May 5).
  • FAQ 47 extended the repayment safe harbor to May 18 (added May 13).

On April 28, the SBA issued IFR “Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Disbursements” which provided three scenarios when a lender would not be entitled to the fee. The first two – prior to full disbursement or if the loan is canceled – seem straightforward. The third – “if the PPP loan is cancelled or voluntarily terminated and repaid after disbursement (including if a borrower repays the PPP loan proceeds to conform to the borrower’s certification regarding the necessity of the PPP loan request)” – garnered the most questions.

Some of the uncertainty about the third scenario seemed to be removed with the issuance of FAQ 46, which provides a presumption that, “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith” (added May 13).

However, the uncertainty remained for loans greater than $2 million. FAQ 46 also states:

SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request (added May 13).

Previously, the deadline for lenders’ submission of the initial SBA Form 1502 reporting information was May 22, 2020. With FAQ 48, the SBA extended the deadline for lenders to electronically upload the initial SBA Form 1502 reporting information to the later of: 1) May 29, 2020, or 2) 10 calendar days after disbursement or cancellation of the PPP loan (added May 19).

The SBA provided clarity on when the lender is not entitled to the fee in its May 22 IFR on “SBA Loan Review Procedures and Related Borrower and Lender Responsibilities” and in SBA Procedural Notice (PN) “Paycheck Protection Program Lender Processing Fee Payment and 1502 Reporting Process” (issued May 21). Information is summarized as follows:

Canceled, terminated, or repaid due to ineligibility

A lender will not receive a processing fee if the PPP loan is canceled, terminated, or repaid after disbursement because SBA conducted a loan review and determined that the borrower was ineligible.

When won’t a Lender receive a processing fee? (PN)

A Lender will not receive a processing fee:

  • Prior to full disbursement of the PPP loan;
  • If the PPP loan is cancelled before disbursement;
  • If the PPP loan is cancelled or voluntarily terminated and repaid after disbursement but before the borrower certification safe harbor date [footnote (FN) 4] (including if a borrower repays the PPP loan because of a misunderstanding or misapplication of the borrower’s certification regarding the necessity of the PPP loan request); or
  • If the PPP loan is cancelled, terminated, or repaid after disbursement (and after the borrower certification safe harbor date) because SBA conducted a loan review and determined that the borrower was ineligible for a PPP loan. [FN 5]

FN 4: The borrower certification safe harbor date, which is May 18, 2020, refers to a borrower who applied for a PPP loan and repays the loan in full on or before May 18. A borrower that makes full loan repayment by the safe harbor date will be deemed by SBA to have made the required certification in good faith. See SBA Paycheck Protection Program Loans: Frequently Asked Questions (FAQs), FAQ 47, posted on May 13, 2020.

FN 5: Following a loan review by SBA, a borrower may be determined to have been ineligible for a PPP loan if, for example, the borrower did not meet the applicable size standard or lacked an adequate basis for the certifications that it made in its PPP loan application. 

Errors or incorrect amounts

SBA may review the payment of processing fees at a time as deemed appropriate.

Will SBA review the payment of Lender processing fees? (PN)

SBA may review the payment of Lender processing fees at the time of forgiveness purchase or at any other time SBA deems appropriate. If SBA determines the fee was paid erroneously or in the incorrect amount, Lender is responsible for repaying the fee to SBA. 

Borrower ineligibility

If within one year after the loan was disbursed SBA determines that the borrower was ineligible based on its review, SBA will seek repayment of the processing fee from the lender.

Is the lender eligible for a processing fee if SBA determines that a borrower is ineligible? (IFR)

No. If SBA conducts a loan review and determines that the borrower was ineligible for a PPP loan, the lender is not eligible for a processing fee. 

Are Lender processing fees subject to clawback if SBA determines that a borrower is ineligible? [Marked to compare the IFR and PN, PN as original]

Yes. For any SBA reviewed PPP loan, if within one year after the loan was disbursed SBA determines that the borrower was ineligible based on the provisions of the CARES Act or applicable rules or guidance available at the time of the borrower’s loan application, or the terms of the loan application, SBA will seek repayment of the processing fee from by the Lender that originated the loan. However, SBA’s determination of borrower ineligibility will have no effect on SBA’s guaranty of the loan if Lender has complied with its obligations under section III.3.b of the initial PPP Interim Final Rule (as further explained in FAQ 1) and the document collection and retention requirements described in the lender application form (SBA Form 2484).

Failure of lender responsibilities

If the lender does not satisfy the payroll cost confirmation and review of documentation requirements, SBA will seek repayment of the processing fee.

Are Lender processing fees subject to clawback if a Lender has not fulfilled its obligations under PPP regulations? [Marked to compare the IFR and PN, PN as original]

Yes. If a Lender fails to satisfy the requirements applicable to Lenders that are set forth in section III.3.b of the initial PPP Interim Final Rule (as further explained in FAQ 1) or the document collection and retention requirements described in the lender application form (SBA Form 2484), SBA will seek repayment of the processing fee by the Lender who originated the Loan, and may determine that the loan is not eligible for a guaranty. However, even in cases where processing fees are subject to clawback, SBA’s guaranty will not be affected if the Lender has complied with these obligations.  

The clawback conditions introduce uncertainty about whether the fee is refundable, particularly for the borrower ineligibility. To meet the scope of Accounting Standards Codification (ASC) 310-20, “Receivables: Nonrefundable Fees and Other Costs” (originally Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated With Originating or Acquiring Loans and Initial Direct Costs of Leases”), and therefore amortize as interest income, the fee must be nonrefundable. When refundable fees become nonrefundable, those fees are in the scope of ASC 310-20.

ASC 310-20-15-3:
The guidance in this Subtopic does not apply to the following transactions:

  1. Loan origination or commitment fees that are refundable; however, the guidance in this Subtopic does apply when such fees subsequently become nonrefundable. 

Forgiveness and the amortization period

Initial reactions about the PPP suggested the loan lives would be relatively short, with the assumption the loans quickly would be forgiven. As such, perhaps prepayments could be estimated to support recognizing the fees over a shorter life. However, lenders likely do not have sufficient information and historical support to demonstrate the ability to estimate prepayments. In addition, with borrowers not necessarily meeting the program requirements (for example, spend dollars on payroll during an eight-week period), forgiveness expectations become more uncertain as does the ability to predict prepayments if accounted for under ASC 310-20.

Legislative developments (updated)

On May 28, the House passed the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010). The House bill, introduced by Minnesota Rep. Dean Phillips along with 86 co-sponsors, passed with a nearly unanimous vote of 471-1. On June 3, the Senate passed H.R. 7010 by a unanimous voice vote, and the president signed it into law on June 5. The new act extends the covered expense period from eight to 24 weeks, extends the maturity date of the loan out five years, and gives greater flexibility to employers having difficulty rehiring workers. However, it does not delay the deadline for new PPP applications, which still expires on June 30.

Here is a comparison of the original PPP and certain changes in H.R. 7010:

PPP and proposed legislative changes table

Concluding thoughts

Senate Majority Leader Mitch McConnell has publicly acknowledged the potential need for technical improvements to the PPP should Congress appropriate more money. Any additional legislative developments also could determine the financial reporting – which is important with the June 30 quarter-end about one month away.

Financial reporting for the borrower

Given that the SBA’s PPP is executed in the form of a loan, entities that borrow funds under the program can always account for the loan under ASC 470, “Debt.” Under that guidance, the loan is accounted for as a financial liability, with interest expense accrued in accordance with the interest method under ASC 835-30, “Imputation of Interest.”1  Furthermore, the financial liability is derecognized when repaid or, if forgiven, recorded as a gain on extinguishment of debt when “legal release” is granted by the SBA or lender. See ASC 405-20-40-1, “Liabilities: Derecognition.”

However, if a borrower believes it is probable the conditions for forgiveness of all or a portion of the loan will be met, then it may choose to account for the loan as a government grant. A borrower should use the following if it determines the loan will be accounted for as a grant:

Not-for-profit entity

If the borrower is a not-for-profit entity, it should account for the loan as a conditional contribution under ASC 958-605, “Not-for-Profit Entities: Revenue Recognition.”

For-profit entity

If the borrower is a for-profit (or business) entity, it should establish a policy to account for the grant. In addition to ASC 470, other alternatives might include: 1) International Accounting Standards (IAS) 20, “Accounting for Government Grants and Disclosure of Government Assistance”2; 2) ASC 958-605; or 3) ASC 450-30, “Gain Contingencies.” In addition, the borrower should continually assess its ability to meet the conditions for forgiveness. If a borrower can no longer support the conclusion that the conditions for forgiveness will be met, then it might need to reverse any grant income recognized.

Accounting policy considerations and financial statement disclosures

Before selecting an accounting policy, the borrower first should consider whether it has an existing policy for similar grants. If not, then it should select a policy that best reflects the nature and substance of the grant. Regardless of the policy applied, borrowers with material PPP loans should disclose their accounting policy and the impact of the loan on their financial statements.

 

 

1 An entity should not impute additional interest at market rates because the guidance in ASC 835-30 on imputing interest excludes transactions where interest rates are set by governmental agencies.

2 We understand the SEC staff will not object to registrants accounting for PPP loans under IAS 20 if: 1) the registrant is eligible to receive the PPP loan and 2) it is probable the loan will be forgiven.

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Sydney Garmong
Sydney Garmong
Office Managing Partner, Washington, D.C.