Rental Properties – How does a change in interest rates affect my ROI?

This is a question that many rental investors have been asking and the answer is complicated. Higher interest rates will likely reduce the return on investment (ROI) and cash flow of your rental property due to increased mortgage payments.

If your rental mortgage is subject to a 5-year refinancing clause, your rental ROI could be lower than when you purchased the property due to the new interest rates. Additionally, it may result in reinvestment risk, as some investors with locked lower interest rates may decide to keep their current rental, as reinvesting will likely result in higher interest rates.

As a CPA, I love looking at numbers. So, let’s look at a couple of examples using pro forma financial statements. A pro forma financial statement leverages hypothetical data or assumptions about future values to project performance over a period that hasn’t yet occurred.

Grant purchases a building worth $500,000. The building is financed with a 15-year, $400,000 loan. The building provides $45,000 in annual rental income in its pro forma. The pro forma expects a three percent increase in rental income, property taxes, and maintenance expenses each year. Depreciation is calculated over 39 years.

In Example 1, Grant purchases the building in 2022 with a fixed interest rate of 4.75%. The first ten years would look like this:

In Example 2, Grant purchases the building in 2023, with a fixed interest rate of 8.5%, the first ten year would look like this:

As demonstrated in the examples above, a significant investment opportunity hinges largely on one crucial factor – interest rates. While rising interest rates could result in increased rents (as fewer individuals may want to take out a mortgage), and rentals are typically a long-term game even though short-term ROI are diminished, long-term appreciation and rental income can still make these a worthwhile investment. Like I said, it’s complicated.

November 6, 2023

Proper Accounting for PPP Loans

The CARES act provided funds through the Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA), to support businesses and nonprofits that were impacted by the COVID-19 pandemic. Many businesses were successful in being granted these funds. With the modifications to the program, most businesses in our region plan to submit for full forgiveness of their PPP loan. Like the PPP forgiveness application process, the accounting for PPP loans is new and different. No specific guidance exists in US generally accepted accounting principles (GAAP) relating to a potential forgivable loan from the federal government to a commercial business.  As there is no specific guidance, we default to relying on guidance that is reasonably applicable based on the facts and circumstances.

This article will outline two methods of accounting for PPP loans that most businesses will elect to follow.

Accounting for PPP loans as debt

Each borrower had to sign a debt agreement after a successful PPP application with their financial institution. PPP loans are a legal form of debt, so reasonably applicable guidance includes FASB Accounting Standards Codification (ASC) 470 Debt. Under ASC 470 Debt, the business records the PPP loan as debt and accrues interest on this loan at the rate set in the debt agreement, which is one percent. A business does not have to impute a market rate of interest (even through a one percent interest rate may be below market rate), as ASC 825-30 Financial Instruments scopes out government guaranteed obligations. The business would record a gain when the debt is extinguished, including a gain on accrued but unpaid interest.

Under ASC 405-20, Liabilities: Extinguishments of Liabilities, the borrower would record income and derecognize the liability when the following conditions are met:

  • The debtor pays the creditor and is relieved of its obligation for the liability.
  • The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. 

The legal release would be when the borrower receives forgiveness approval from the SBA via the lender informing the borrower.

The presentation of the PPP loan on the balance sheet if forgiveness is not granted before year end requires thoughtful consideration. If forgiveness is expected in the next fiscal year, the PPP loan would be shown as a current liability. Alternatively, a business can elect to follow the maturity of the loan based on the legal terms of the loan. It would be prudent for a business to talk about PPP accounting with their lender if they have restrictive debt covenants. They should also talk with any outside parties such as bonding companies.

Accounting for PPP loans as government grants

As a second option, a business can make the accounting policy election to follow Internal Accounting Standards (IAS) 20 Accounting for Government Grants and record the PPP loan as a forgivable government grant.  Grant income would be recorded on a systematic basis when there is reasonable assurance that the conditions to receive forgiveness will be met. This would generally mean the business would record the earnings over the 8- or 24-week period that the eligible costs are incurred.  However, eligible costs are not the sole determination of “reasonable assurance”, and salary and employee levels must also be taken into consideration.

We recommend that businesses review the facts and circumstances of their business when selecting the accounting surrounding the PPP loan.

You can expect additional financial statement disclosures related to the pandemic and any applicable funding the business received, including PPP.  Be prepared to visit with your auditors about the business’s ability to continue operations, cash flow and budget projections, investment declines, and the status of any forgiveness application that has been filed.  If business continuity is uncertain, the audit opinion letter may include a going concern disclosure that clearly identifies the challenges you face.

If you’re a nonprofit organization, please see our article Nonprofit Accounting for PPP and EIDL Funds on our website.

Don’t let accounting for these unique cash flow streams become frustrating. The experts at Ketel Thorstenson, LLP are happy to assist you in navigating the accounting details summarized in this article!

January 7, 2021

Unclaimed Property: What are the Rules?

Unclaimed Property. More than likely most every business has unclaimed property. To ignore the rules of unclaimed property could result in steep penalties and result in a higher risk of being audited. This article will walk through unclaimed property rules.

What is Unclaimed Property?
“Unclaimed property consists of abandoned financial assets such as checking and savings accounts, unpaid wages, securities, life insurance payouts, uncashed checks, and the proceeds of safe deposit boxes that are without activity for a certain period of time. It does not include real estate or vehicles,” as defined on the SD Unclaimed Property Division’s website.

How Does Property Become Unclaimed?
There are many ways in which property could become unclaimed. It might be due to a terminated employee forgetting to pick up their final paycheck, an employee or vendor change of address, or an owner simply did not knowing about the property.

Reporting and Deadlines
There are five simple steps to ensure compliance:

  1. Review records regularly
  2. Make a reasonable effort to contact the Owner
  3. Prepare the report
  4. Submit the report and remit
  5. Retain records

Review Records Regularly
The easiest way to consistently identify outstanding payables is to review the bank reconciliation monthly, research the outstanding checks, and document the adjustments. It is important to keep up with outstanding payables, as it is easier to make an effort to contact the owner instead of reporting unclaimed property.

When researching, the goal is to determine the date of last contact or activity for each customer account or outstanding amount owed to a client, customer, vendor or employee. Once the research is complete, the next step is determining if the property is considered unclaimed.

Property is Unclaimed if both of the following are true:

  1. The property has been uncashed for 1-3 years.
  2. There has been no contact with the Owner during the 1-3 year abandonment period.

Property Categories              Number of Years Dormant

Wages/Commissions                                       1

Utility Deposits/Refunds                                1

Safe Deposit Boxes                                          3

Checking/Savings/Cashier Check Accounts                 3

Traveler’s Checks                                                            15

You can find the complete matrix on the SD Unclaimed Property Division website.

Make a Reasonable Effort to Contact the Owner
Before reporting and remittance, due diligence should be exercised to notify and return the property to the owner. Notices are to be sent via U.S mail no less than 60 days prior to escheatment. The requirement of due diligence only applies to amounts of $50 or more – the State does not have a minimum for the requirement to report. If these attempts do not produce any activity or claim, the property should then be reported to the State.

What to include in the notification(s):

  1. A statement that the property is being held to which the addressee appears to be entitled.
  2. Information regarding any changes of the name of the holder.
  3. A statement that the property will escheat to the state.
  4. Letters must be sent no less than 60 days prior to escheatment.

An example letter of this notification can be found on the SD Unclaimed Property Division website.

Prepare the Report
All property not previously reported to the Unclaimed Property Division and unclaimed for the applicable period of dormancy should be included in the report. Holders are required to report all available Owner information – including last known address, the date last contacted, and a description of the property.  Submitting as much information as possible will reduce the need for further contact by the state.

Submit Report and Remit
Property reports must be submitted to the Unclaimed Property Division via a secure file transfer portal in the NAUPA format via the Unclaimed Property Division’s website under “Submit a Report.” Holders failing to submit a report will be subject to a penalty.

Retain Records
A record of the name and last known address of the Owner must be maintained for ten years after the property becomes reportable. If audited, and this information is unavailable, penalties may be incurred.

Voluntary Disclosure
The State offers a Voluntary Disclosure Program for those who haven’t been compliant or who have discovered unclaimed property which should have been reported. This program provides a way to report those over-looked properties – without penalty or interest. Further details regarding this program are available on the Unclaimed Property Division’s website under “Voluntary Disclosure Program.”

Government and Public Entities
Government and Public entities have some differing guidelines. The Public Entities Reporting Manual is available in digital form on the Unclaimed Property Division’s website under “Reporting Guidelines.”


SD Unclaimed Property Division Website:

NAUPA Website:

SD Codified Laws:

Please note that unclaimed property laws vary in each state.  The above discussion is specific to South Dakota.

December 7, 2020

Remote Work Rookie Tips- from your CPA

It’s been a really challenging time to adjust to our new normal work routines with COVID-19. Numerous employees in our nation are working from home, including some of our KT employees. I am a work-from home-rookie, but I thought I would provide a couple tips and tricks that we have shared with our team during this crazy time.

 If you have never used Zoom or Microsoft Teams, make sure you download one of them. These are video conferencing and instant messaging platforms. Plus Zoom is free for all users! Google is your friend, if you’re wondering how to share screens, video chat or virtually anything, there is a video that will walk you through how to use each program. These are critical tools to ensure you can still collaborate with co-workers. Also, a little human interaction never hurts. I like to have a morning meeting with my team to set up expectations on what we are hoping to accomplish during the day. I also encourage check-ins throughout the day, where we share screens and discuss any challenges.

Over communication is the key, it keeps everyone on the same page. Even if it’s a 5-minute team meeting, it keeps everyone connected. We are all learning how to work in this new environment, so an extra check in never hurts. COVID-19 has shown that a lot of meetings could be emails, which does not hurt my feelings!

No printer? No problem! If you have Adobe DC PDF software, now is the time to explore all of its cool features. Did you know you can highlight, write text, use stamps, search text in PDF and much more. For example, bank statements that you would normally print and use your highlighter for marking cleared transactions, can now all be done within Adobe! Plus, you don’t have to scan the bank statement in electronically as it would be electronic already. Take advantage of the signature stamp feature to ensure that internal controls over bank statements are documented – sorry for the internal control plug! This is a challenging time, but I think we will come out of it with new developed skill set and knowledge on how to leverage new and different tools.

Keep watching the KTLLP blog page and social media for new updates.


April 8, 2020

Meet the Team – Kyle Kopren

I am Kyle Kopren a manager at KT and a member of KT’s Non-Profit Term. My specializations include: retail/manufacturing, nonprofits, financial institutions and construction. Throughout the year I get to experience a wide variety of different industries.

I enjoy working on larger more complicated jobs as it is fun to understand the organization’s operations. I like my job because I get to see multiple client’s operations throughout the year.

I grew up on a ranch in northwest South Dakota near Bison, where I still enjoy going back to and helping family out. I graduated from a large class of eight students from Bison High School. For post-secondary education I received a double major in business administration and accounting at the University of Mary in Bismarck, North Dakota. After four years in North Dakota, I wanted to come home to South Dakota so Ketel Thorstenson was a perfect fit. Outside of KT, I am a member of my church’s finance committee and a member of the professional development committee for the South Dakota CPA Society. When I am not working you can find me at the golf course losing golf balls, fishing or in my garage doing woodworking projects. I find all three hobbies frustrating and rewarding at times. Most off all, I enjoy the outdoors which makes living in the Black Hills the right match.

April 24, 2019

Audit Preparation Series: Managing an Audit

Kyle KoprenYour organization has determined that an audit is either required or desired. Starting on the right foot includes making a determination of who will oversee the audit process. What makes the most sense for your organization? This question will be answered in this article which is a continuation of a series of articles addressing preparation of an audit.

Who will be responsible for the audit process?

The board’s first step in preparing for a financial statement audit includes determining who will be responsible to oversee the audit. Either the whole board or a subcommittee of the board may be responsible for the audit process.  Responsibilities include overseeing the hiring and evaluation of the audit firm, overseeing communication with the finance department throughout the audit, and reviewing and approving of the audited financial statements. It is important if a subset of the board is charged with governance of the audit that the official meeting minutes document the authorization and directly communicate the decision to the auditor.

What is an audit committee and what are their responsibilities?

An audit committee is part of the overall board of directors and is usually comprised of individuals that have strong financial backgrounds. Ideally audit committee members should have past experience serving on other organizations boards or significant business experience in a financial monitoring role. Having experienced individuals on the audit committee is crucial to ensure that the financial statements represent a fair presentation of the organization’s financial condition. The audit committee also is responsible to draft responses to the findings reported in the auditor’s management letter.  A management letter may be issued by the audit firm that outlines deficiencies in the internal control environment identified by the audit. If further action is required to address findings in the management letter, the audit committee should work with the responsible parties of the organization throughout the year to ensure that the findings gets resolved in a timely and efficient matter.  In some situations, governance will accept certain findings if the findings would be too costly to fix. A common example is a finding related to financial statement preparation performed by the auditor would be too costly to resolve this finding.

Do organizations need to have an audit committee? What are the benefits?

An organization is not generally required to have an audit committee unless an oversight organization requires one. However, many organizations find it beneficial as it reduces the work load of the board. With a smaller committee size, it creates efficiencies in scheduling meetings, which promotes meeting on a more frequent basis if desired. A subcommittee creates more open and comprehensive communication with the auditors as committee members have more time to devote to the audit process instead of limiting communication to a short presentation of the audited financial statements to the whole board. The subcommittee can also contribute by having a more consistent role which leads to a greater understanding of the organization’s accounting functions and to help facilitate and implement internal control improvements.

Governance involvement during an audit

At the beginning of the audit process, the auditor will contact a member of governance. The auditor will generally inquire about any noncompliance, fraud or any other matters that would have affected the organization in the current year. The auditor will also inquire about any concerns governance has and how the auditors can help address those concerns during the audit. Governance should review the engagement letter from the audit firm to accept the responsibilities and understand the services to be performed.  If any difficulties occur in the audit process, governance will often assist with a resolution. During the final stage of the audit, governance will review, approve, and accept the audited financial statements to ensure that they adequately support the books and records of the organization. It is very important that governance is forthcoming and provides the audit firm with accurate and truthful information.

Stay tuned for the next installment of the preparation of an audit series where we discuss fraud and the planning process.

For additional information, please contact any of Ketel Thorstenson’s nonprofit experts.

June 5, 2017

Why is that Operating Lease on my Balance Sheet?

Kyle KoprenBackground

The current lease accounting standards have been in existence since 1977 under Financial Accounting Standards Board (FASB) Number 13.  We are all familiar with these rules – generally, leases are expensed as payments are due (i.e. operating leases) unless you meet one of four specific requirements to show the lease on your balance sheet.  These types of leases are known as capital leases, and require the leased asset to be added to the balance sheet and depreciated over the lease term.  In addition, the full amount of future lease payments is presented as debt on the balance sheet and reduced as payments are made.  In fact, many vendors are familiar enough with the lease accounting rules that they can structure the lease to meet the desired accounting treatment (i.e. operating or capital lease).

Over the years, much debate has occurred over whether traditional operating lease accounting “hides” liabilities from the public by keeping them off the balance sheet.  As a result, effective for all calendar year 2020 financial statements, FASB has revised the lease accounting rules to address this debate.

New Rules

The new rules still retain operating and capital (now called financing) leases.  The accounting for financing leases is virtually identical to the old rules; however, the rules for operating leases have changed significantly.  Operating leases will now be accounted for similar to financing leases:

  • Record asset (“right-to-use” asset) and liability (debt obligation) for the present value of future minimum lease payments.
  • Lease expense is recorded on a straight-line basis over the term of the lease. This results in the same amount of expense as would have been recorded under the old rules.
  • The liability is reduced based on an amortization schedule allocating cash payments between principal and imputed interest.
  • The asset is amortized over the term of the lease – this is not done on a straight-line basis, but is the resulting “credit” needed to balance the effects of the above journal entry.

The FASB did grant an exception to applying the new rules for all short-term leases of 12 months or less.  Renewal options that are likely to be exercised must be considered when determining if it meets the 12 months or less criteria. In addition, any purchase options would preclude you from utilizing this exception.

The standard also includes many details regarding the definition of a lease, which amounts are included in lease payments, selection of a discount rate, lease modifications, subleases, build to suit arrangements, and other intricacies that often arise when dealing with leases.  In addition, there are several new financial statement disclosures that will be required once the new standard is implemented.

What Next?

Although the standard is not effective yet, it’s important to start thinking about it now.  If you issue comparative financial statements, you will need to make the accounting changes for both 2019 and 2020.  The lease changes may significantly change the way your balance sheet looks, to include the calculation of certain key ratios, such as working capital/current ratio.

Start by taking an inventory of all your current leases.  Document the lease terms and provisions so you can begin comparing them to the requirements of the standard.  If you are entering into any long-term lease agreements prior to these dates, you will want to understand if certain provisions in the agreements will change the accounting treatment under the new standard.  You will also want to understand any regulatory provisions included in debt or franchise agreements, as well as how any granting agencies, bonding companies, etc. interpret financial statement ratios.  It will be important to plan ahead so you can educate your financial statement users regarding the changes.  Finally, you will need to consider any necessary software changes for depreciation – the amortization of the right-to-use asset is not based on current methodology and may not be able to be calculated within the software.

Our professionals are here to assist you with this analysis.  Please contact us at 342-5630 for assistance.[/vc_column_text][/vc_column][/vc_row]

September 14, 2016