ASC 310-20: Accounting for Loan Fees and Costs

The Financial Accounting Standards Board (FASB) provides guidance for lending-related fees and costs in Accounting Standards Codification (ASC) 310-20, Receivables—Nonrefundable Fees and Other Costs. This standard dictates how lenders must account for the nonrefundable fees and costs that arise from their lending activities. The primary goal is to ensure that income recognized from a loan accurately reflects the loan’s actual economic yield over its life.

Instead of recognizing fee income immediately when a loan is made, the guidance requires that certain fees and costs be deferred and spread out over the loan’s term. This process of deferral and amortization prevents the front-loading of income, which could distort a lender’s financial performance. By matching income recognition to the period in which it is earned, the standard provides a more faithful representation of the lending relationship.

Scope and Key Definitions

The standard applies broadly to all types of lending transactions, including those by commercial banks, credit unions, and other financial institutions. The guidance covers a wide array of loans, such as mortgages, commercial loans, and consumer credit, as well as loan commitments and financial guarantees.

A central concept is the treatment of loan origination fees. These are nonrefundable fees paid by the borrower to the lender to compensate for the process of initiating a loan. Common examples include application fees, document processing fees, and commitment fees. Another type of origination fee is “points,” which are a form of prepaid interest a borrower pays upfront to secure a lower interest rate.

The guidance also defines direct loan origination costs. These are the incremental, direct costs incurred by the lender that are specifically tied to a successful loan origination. To qualify, a cost must be one that the lender would not have incurred if that specific loan had not been made. This includes expenses for evaluating a borrower’s creditworthiness, negotiating loan terms, and processing final loan documentation. A portion of an employee’s compensation, such as a bonus tied to successful loan production, can also be included.

Conversely, many lending-related expenses are excluded from being classified as direct loan origination costs and must be expensed as they are incurred. Excluded items include advertising, soliciting potential borrowers, and general administrative overhead like rent and depreciation. The costs associated with unsuccessful loan efforts and idle time for employees are also expensed immediately.

Accounting for Net Fees and Costs

The accounting process centers on netting and deferral. A lender must offset the total loan origination fees received from the borrower against the direct loan origination costs for that same loan. The resulting net amount, whether a net fee or a net cost, is not recognized in income immediately. Instead, this net figure is deferred and recorded on the balance sheet as an adjustment to the initial loan balance.

This deferred net amount is then amortized over the life of the loan as an adjustment to the loan’s interest income. The objective is to create a constant effective yield on the loan’s carrying value over its term. This is achieved using the “interest method,” which calculates periodic interest income based on the loan’s outstanding balance and its effective interest rate. The effective rate is the one that equates the loan’s contractual cash flows with the initial loan amount adjusted for the net deferred fees or costs.

For example, a lender issues a $100,000 loan with a 5% stated interest rate and a five-year term. The lender charges the borrower $3,000 in loan origination fees and incurs $1,000 in direct costs, creating a net fee of $2,000. This reduces the initial carrying amount of the loan to $98,000. The lender must then calculate a new effective interest rate that will fully amortize the $98,000 balance over five years.

This new effective rate will be higher than the stated 5% rate. If the effective rate is calculated to be 5.47%, the interest income recognized in the first year would be $5,360.60 ($98,000 x 5.47%), not the $5,000 calculated using the stated rate. This difference represents the portion of the deferred net fee recognized as income in the first year. This process continues each year until the entire net fee is amortized.

Treatment of Specific Fee Types

The standard provides specific guidance for commitment and syndication fees. The accounting for commitment fees, which are fees paid for a promise to lend money in the future, depends on the likelihood that the loan commitment will be exercised. If it is probable the commitment will be exercised, the fee is deferred and recognized over the life of the resulting loan as an adjustment to its yield.

If the commitment is not expected to be exercised, the fee is recognized as service income over the commitment period on a straight-line basis. In cases where the likelihood of exercise is remote, the fee can be recognized as income when the commitment expires.

Loan syndication fees also receive distinct treatment. A loan syndication occurs when multiple lenders group together to fund a single large loan, with one lender acting as the manager. The managing lender receives a syndication fee for arranging the transaction, which is recognized as income when the syndication is complete. This is because the fee is earned for the service of arranging the financing, not for funding the loan.

If the managing lender retains a portion of the syndicated loan, the total fee received must be allocated. A portion of the fee, equivalent to the yield adjustment that would be required for the retained portion of the loan, must be deferred. The remainder of the fee can be recognized as syndication income at the completion of the deal.

Financial Statement Disclosures

The standard mandates specific disclosures in the notes to the financial statements to provide investors and other stakeholders with a clear picture of a lender’s accounting policies. Lenders must be clear about how they account for loan fees and costs.

Entities are required to disclose their accounting policy for how they recognize interest income on loans and how they amortize the net deferred fees and costs. This includes specifying the method used, such as the interest method. The disclosure should provide users with an understanding of the process used to calculate interest income over the life of the loan portfolio.

Lenders must also provide quantitative information about these deferred amounts. The financial statement notes must include the unamortized balance of the net fees or costs that are part of the loan’s carrying value. Additionally, the entity must disclose the total amount of amortization that was recognized as an adjustment to interest income for the reported period.