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Ed Johnson
Ed Johnson, HR & Business Operations Consultant
Category: Finance
Satisfied Customers: 10760
Experience:  Central Michigan University, MSA Candidate; Global Compensation Operations Mngr; AA Degree Lib Arts
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Are origination and commitment fees paid capitalized?

Customer Question

Are origination and commitment fees paid capitalized?

When recording notes payable, I can't find the appropriate accounting guidance to find out what they should be.

Submitted: 8 years ago.
Category: Finance
Expert:  Ed Johnson replied 8 years ago.

For accounting purposes, SFAS No. 91 requires, that loan origination costs and loan commitment fees be capitalized and amortized -- as a yield adjustment -- over the life of the associated loan.

However, for tax purposes The so called Loan commitment fees are not amortized (capitalized).

The tax treatment of these fees is not the same as the accounting treatment.

this article describes in layman's terms the process.

http://www.cfonet.com/article.cfm/3000697?f=search

Please let me know if you have any questions. The reference includes a precedent court case.

Customer: replied 8 years ago.

Thank you. I actually found that same article, but believed that FAS 91 applies when you are the lender, not the borrower. True? In this case we are the borrower. What do you think?

Expert:  Ed Johnson replied 8 years ago.

Yes, they apply to the lender. I use the articles rather than the actual text of the IRS regulations because the IRS regulations are harder to understand sometimes. AND in this case you needed the benefit of the precedence if you were the lender. Since you were using terminology about the accounting, I took it to mean you were the lender.

As the borrower, this depends on the purpose of the loan.

Is this a rental property?

commercial property?

Business use?

Primary or secondary residence?

AND are you using cash accounting or accrual accounting?

Customer: replied 8 years ago.

Thanks again. First, I am only interested in the GAAP treatment, not tax as we are a 501c3. We prepare our f/s on an accrual basis. The fees are associated with a construction loan for a building we are building and a line of credit we obtained from a bank for operations of the organization. It just seems like all the fasb's I read (91) and APB 21 pertained to the lender.

Expert:  Ed Johnson replied 8 years ago.

According to Deloitte, and Millers GAAP guide,

1. the borrower recognizes the commitment fees when the service is performed.

2. The origination fees are taken over the life of the loan.

Reference source:

http://www.deloitte.com

AND 2006 miller GAAP Guide, as accessed through Central Michigan University Research Library.