Insight

Loan accounting: COVID-19 impact

The COVID-19 challenge throws a wrench in loan accounting processes

Chris Boyles

Chris Boyles

Partner, Risk Analytics, KPMG US

+1 213-955-8484

Loan assistance and relief offered through the CARES Act for both individuals and small businesses has an impact on loan accounting and disclosure reporting.

For individuals, the CARES Act includes an option for financial institutions to suspend the requirements of U.S. GAAP for certain loan modifications that would otherwise be categorized as a TDR. A financial institution may elect not to apply TDR accounting to modifications that defer or delay the payment of principal or interest (i.e., payment holiday), that meet certain conditions.

For small business, the CARES Act created the Paycheck Protection Program (PPP), a program allowing small businesses to apply for loans to be used to pay for payroll costs.  The loans may be fully or partially forgiven if the small business meets certain requirements on how the loan proceeds are used.

Loan accounting issues arise once payment deferral or forgiveness is granted. Continuing to recognize interest using the original effective interest rate (EIR) will overamortize the cost basis adjustment. In addition, although PPP loans qualify for CECL zero credit loss exemption, the loans must still flow through banks’ CECL models at zero ECL in order to be included in the amortized cost vintage disclosures.

KPMG can assist financial institutions with new provisional accounting calculations as well as the loan accounting policy changes that impact processes, data, and systems. Read more below.

Loan accounting: COVID-19 impact
The COVID-19 challenge throws a wrench in loan accounting processes