USA When can loan origination fee be expensed under US GAAP?

[Balanced]

Hello all (especially CPAs),

I have a question about loan origination fee. In my experience, these fees are capitalized and amortized over the life of a loan. However, I came across origination fee that was expensed entirely on the financials audited by one of Big Four. There was no mentioning of it in the notes. Is this an auditor's error? Hard to believe, as financials were reviewed by multiple professionals. The fee is a substantial amount over 100,000, so definitely material.
I tried to search the web for related cases and found a vague comment that decision to capitalize or expense origination fee depends on the purpose of the loan. Can't find anything specific...CPAs, please help.

 

[bklynboy]

I am familiar with the rules having done research for my Company on a new loan product we recently issued.

ASC 310-20 dictates the US GAAP accounting for loan origination fees and requires that they be netted (income less cost) and deferred and amortized as an adjustment to the yield over the life of the loan. Regarding origination costs (which is what I assume you are referring to as you say they were expensed), the guidance provides strict rules on when these can be capitalized/deferred. If they do not meet the criteria they are expensed.

Direct loan origination costs include only those costs that are incremental direct costs of loan origination incurred in transactions with independent third parties and certain costs related directly to specific activities performed by the lender for that loan. Examples of incremental costs include commissions paid to acquire the loan, underwriting fees, and costs associated with the processing of loan documents and closing of the transaction. The costs directly related to those activities should only include that portion of the employee salaries and benefits directly related to time spent performing those activities for that loan. All other lending related costs, including those associated with advertising, occupancy and equipment, servicing of existing loans, unsuccessful loan origination efforts and portions of employee salaries not directly related to the origination of a loan, are not considered direct costs and should be expensed in the period incurred.

My guess is these were the types of origination costs that were expensed and would be in accordance with US GAAP. If you can be more specific what types of costs these were and what type of loan it was then I can see if one of the exception rules may have applied.

 

[Balanced]

Thank you. Perhaps I did not make myself clear - we are the borrower, not the lender. Unfortunately, I can not find specific guidelines for the borrow's side....

 

[bklynboy]

Can you attach the link to the site where you saw this or better describe the type of transaction? There are instances where this could be expensed and really depends on what transaction this is (real estate, construction loans, mortgage loan, commitment, etc). US GAAP is much more rules based as opposed to IFRS which is principle based and there are instances where treatment of an item can differ depending on the industry or type of event.

Also, $100K is not necessarily material as it depends on the company's size. At my company, our auditors have set materiality at a higher level (roughly $1% of equity or 5% of net income) given we have $300 billion of assets, $20 billion of equity and generate $1 billion of annual earnings.

 

[Balanced]

In a nutshell, company received a loan at certain interest rate for 42 months (collaterized by factory equipment). Origination fee of 100,000 was charged as the loan was issued. That fee was expensed to Interest Expense account in the month when it was paid. Auditors left it intact in that account, although I would have recorded it as a contra liability to the loan and amortized it against interest expense through re-payment period. As far as I know, this is the correct way to handle origination fee for the borrower. My question is, did the auditors overlook it? Or did they justify it somehow (but how exactly)? Naturally, I can not ask them. Amount is material for the company.

 

[bklynboy]

From your explanation I agree with your conclusion and also checked with our auditors (PwC) who also concur. Since I dont know the purpose of the loan, there could be an instance where its expensed. In FAS 34 (Capitalization of interest), if an entity is acquiring a loan for the purpose of manufacturing inventories, then interest (and origination costs) would be expensed and not capitalized as part of the asset (in your example you stated that this was a contra liability so I am assuming its not a construction project).

Assuming, this was not a materiality call, I cant find any other logic to support expensing these costs if its a typical loan. Perhaps some others can find something useful.

 

[Balanced]

Thank you. That is what I have suspected; it was most likely an oversight. Loan was obtained for factory equipment purchase & installation.

 

[Redpim2]

Hello
How do you present the loan origination cost in the balance sheet?
We recently had a loan,with a loan origination cost of over 100K i have booked it as contra liability account and presented the loan balance net of the unamortized loan origination cost .On my understanding the loan origination cost will be amortized as an expense .
Please help.
Thank you

 

[Triest123]

Hello
How do you present the loan origination cost in the balance sheet?
We recently had a loan,with a loan origination cost of over 100K i have booked it as contra liability account and presented the loan balance net of the unamortized loan origination cost .On my understanding the loan origination cost will be amortized as an expense .
Please help.
Thank you

Your approach is to treat the loan origination costs as the part of the EIR (Effective
Interest rate).

It is applied only if the incurred orgination cost acts as the discount of the interest rate
(i.e. lower than the normal market interest rate) or can offer a condition that the borrowing rate (as agreed) on the loan commitment date can be adjusted due to the market interest rate decline on the loan drawdown date.

Assumed you borrow $1,000,000 from the bank on 1 Jan 2012, repayable on 31 Dec 2014
the loan origination costs $100,000- the agreed interest rate is 2% p.a.

The total actual interest paid for the 3 years is $1,000,000 x 2% x 3 yrs = $60,000
So the effective interest rate for the loan is $160,000 / $1,000,000 / 3 years = 5.33% p.a

The accounting entries are

Dr Bank $900,000
Cr Bank Loan $900,000
To record the loan drawdown of $1,000,000 with the payment of loan origination
costs of $100,000


Dr Loan Interest ($1,000,000 x 5.33%) 53,333
Cr Bank Loan 33,333
Cr Bank ($1,000,000 x 2%) 20,000
To record the interest expenses & the interest payment
for the year 2012

Dr Loan Interest ($1,000,000 x 5.33%) 53,333
Cr Bank Loan 33,333
Cr Bank ($1,000,000 x 2%) 20,000
To record the interest expenses & the interest payment
for the year 2013

Dr Loan Interest ($1,000,000 x 5.33%) 53,334
Cr Bank Loan 33,334
Cr Bank ($1,000,000 x 2%) 20,000
To record the interest expenses & the interest payment
for the year 2014


Dr Bank Loan $1,000,000
Cr Bank $1,000,000
To record the repayment of bank loan due on 31 Dec 2014

 

[Redpim2]

Your approach is to treat the loan origination costs as the part of the EIR (Effective
Interest rate).

It is applied only if the incurred orgination cost acts as the discount of the interest rate
(i.e. lower than the normal market interest rate) or can offer a condition that the borrowing rate (as agreed) on the loan commitment date can be adjusted due to the market interest rate decline on the loan drawdown date.

Assumed you borrow $1,000,000 from the bank on 1 Jan 2012, repayable on 31 Dec 2014
the loan origination costs $100,000- the agreed interest rate is 2% p.a.

The total actual interest paid for the 3 years is $1,000,000 x 2% x 3 yrs = $60,000
So the effective interest rate for the loan is $160,000 / $1,000,000 / 3 years = 5.33% p.a

The accounting entries are

Dr Bank $900,000
Cr Bank Loan $900,000
To record the loan drawdown of $1,000,000 with the payment of loan origination
costs of $100,000


Dr Loan Interest ($1,000,000 x 5.33%) 53,333
Cr Bank Loan 33,333
Cr Bank ($1,000,000 x 2%) 20,000
To record the interest expenses & the interest payment
for the year 2012

Dr Loan Interest ($1,000,000 x 5.33%) 53,333
Cr Bank Loan 33,333
Cr Bank ($1,000,000 x 2%) 20,000
To record the interest expenses & the interest payment
for the year 2013

Dr Loan Interest ($1,000,000 x 5.33%) 53,334
Cr Bank Loan 33,334
Cr Bank ($1,000,000 x 2%) 20,000
To record the interest expenses & the interest payment
for the year 2014


Dr Bank Loan $1,000,000
Cr Bank $1,000,000
To record the repayment of bank loan due on 31 Dec 2014

Thank Triest.
I did try to make an effective interest amortization schedule using excel and for some reason it wont zero out at the end of term of the loan. Loans are paid in a series of monthly payment of about 250 K at interest rate of 5.5% . I come up with 5.66% effective interest . terms are 60 months.

 

[Triest123]

Thank Triest.
I did try to make an effective interest amortization schedule using excel and for some reason it wont zero out at the end of term of the loan. Loans are paid in a series of monthly payment of about 250 K at interest rate of 5.5% . I come up with 5.66% effective interest . terms are 60 months.

=> Based on your information, it can be deduced that
the original loan amount is $13,088,208.86 (based on the interest rate 5.5%)

After paying the loan origination costs of $100,000, the actual loan amount
(i.e. the money you actually received) is $12,988,208.86

And the effective interest rate is around 5.8178719%

 

[Austin400]

Loan origination fees on letter of credit

Hi everybody,

We recently entered into a letter of credit arrangement with a bank and they assessed an origination fee of about 14K. I have read all the posts on this thread and as I understand, these fees are to be amortized over the life of the loan, but in this case the LOC has not been used yet, so how do we amortize the fees? should we amortize on a straight line basis?

Thanks

 

[Triest123]

Hi everybody,

We recently entered into a letter of credit arrangement with a bank and they assessed an origination fee of about 14K. I have read all the posts on this thread and as I understand, these fees are to be amortized over the life of the loan, but in this case the LOC has not been used yet, so how do we amortize the fees? should we amortize on a straight line basis?

Thanks

=> You can simply treat it as "Bank Charge" as the amount is immaterial

 

[kdhcpa]

Loan Costs

My company borrowed $2.5 million with the proceeds to be used to buy out a majority shareholder. There were fees associated with the loan of about $70,000 (material). The loan is a 10-year fixed rate loan with monthly payments, with real estate as collateral. Also, we borrowed $2 million to be used for general operating purposes. This is also a 10-year loan with monthly payments with equipment as collateral. The fees associated with this loan were about $81,000 (also material). My question is since the loan proceeds were not used for fixed asset purchases, should the related fees on both loans be expenses or capitalized?