Revisiting Debt Modifications

As companies continue to apply for Paycheck Protection Program (PPP) loan forgiveness and many wait to hear from the U.S. Small Business Administration on the status of their applications, accounting personnel are having to revisit the Financial Accounting Standards Board’s (FASB) guidance on debt modifications and extinguishments.

Debt modifications and exchanges are typically analyzed on the basis of the underlying terms of existing and new debt instruments. Should terms between the two be substantially modified, accounting for the exchange is accounted for like an extinguishment of debt. 

A primary way to determine whether the terms are ‘substantially’ different can be ascertained by verifying the present value of cash flows under the new agreement. An exchange of debt instruments between or a modification of a debt instrument by a debtor and creditor in a nontroubled is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10% different from the present value of the remaining cash flows under the terms of the original instrument. If terms of a debt instrument are changed or modified and the cash flow effect on a present value basis is less than 10%, the debt instruments are generally not considered to be substantially different should there be no conversion option (FASB Accounting Standards Codification 470-50-40-10).

Depending on your type of company, there are a few different ways to treat the extinguishment of your PPP loan. Some entities will treat the loan as income in the period it’s forgiven, while others will be able to treat loan proceeds as an offset to the underlying expenses for which the loan was issued and proceeds are utilized. 

As you continue to work your way through the PPP loan forgiveness process, please don’t hesitate to reach out to our team with any questions or visit our dedicated PPP Loan webpage.