Interest Income Recognition on COVID-19 Loans
On Wednesday, April 8, the FASB held a Board meeting where they discussed recognition of interest income on loans modified as a result of COVID-19.
The FASB reviewed a specific fact pattern and tentatively confirmed that recognition of interest income would be appropriate. Below are the details of the Board decision:
The staff received a technical inquiry regarding the recognition of interest income. For illustrative purposes that inquiry included a fact pattern whereby an institution was providing assistance to borrowers impacted by COVID-19. The institution in the example provided a “loan payment holiday” allowing borrowers to temporarily stop payments. Interest would not accrue while the loan payment holiday is in effect. The loan modification in the fact pattern did not represent a troubled debt restructuring in accordance with Subtopic 310-40, Receivables—Troubled Debt Restructuring by Creditors. Additionally, in accordance with Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs, the modification would be accounted for as the continuation of the original lending arrangement; that is, not as a new lending arrangement—in which case the modification would not be accounted for as an extinguishment of the original loan and the recognition of a new loan.
The staff discussed its response to how the institution should recognize interest income when a payment holiday is given and interest is not accrued in this scenario. There were two views expressed in the technical inquiry:
- View 1—Upon modification, a new effective interest rate in accordance with Subtopic 310-20 is determined that equates the revised remaining cash flows to the carrying amount of the original debt and is applied prospectively for the remaining term. That is, interest income is recognized during the payment holiday period.
- View 2—Upon modification, the institution should recognize interest income on the loan in accordance with the contractual terms. Under this view, the institution would recognize no interest income during the payment holiday and would resume recognizing interest income when the payment holiday ends.
The staff reviewed the submission, accompanying illustrations, and referenced accounting guidance and believes both views to be appropriate.
The above specifically addresses a scenario where interest will not accrue during the payment deferral period. We believe institutions can also apply this logic to scenarios where interest will continue to accrue. There are many different deferral scenarios in place and based on the above, it is our view that it is appropriate for an institution to recognize interest income during the deferment period based on the revised remaining cash flows, whether interest will accrue or not based on the terms of the modification. If interest is not forgiven during the deferral period, there may not be a significant difference between the original effective interest rate and the revised effective interest rate for many loans. For some, this difference may be significant enough for an institution to consider revising the effective interest rate used for the loan on a prospective basis. Based on the expected volume of modifications related to COVID-19, it will be important for the finance and lending functions to have a good process in place to assess whether this difference is significant based on the terms of the modified loans.
We will keep you posted as further information becomes available. As always, please do not hesitate to contact us with any questions at all that you have related to the CARES Act or anything else caused by these uncertain events. We are here to help in any way we can.
For more information or a discussion on how this may impact you, please contact Jeff Skaggs or your BNN advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.