A Comprehensive Guide to Accounting for Loan Origination Fees

When a company takes out a new loan, there are often fees charged by the lender known as loan origination fees Proper accounting treatment and reporting of these loan fees is essential This comprehensive guide will explain what loan origination fees are, how to calculate them, and most importantly, how to account for them correctly using journal entries and financial statement reporting.

What are Loan Origination Fees?

Loan origination fees, also called loan origination costs, are upfront charges assessed by a lender when originating a new loan. The fees are typically a percentage of the total loan amount.

Common examples of loan origination fees include:

• Application fees
• Processing fees
• Underwriting fees
• Administrative fees
• Attorney fees
• Title searches
• Appraisal fees
• Recording fees

These fees compensate the lender for the work required to establish the loan. Origination fees are distinct from interest and are charged upfront at loan closing.

How are Loan Origination Fees Calculated?

Loan origination fees are stated as a percentage of the total loan amount. Common percentages range from 1% to 10%, but can vary based on the lender and type of loan.

For example, on a $100,000 business loan with a 5% origination fee, the fee would be $5,000 ($100,000 x 5%). Origination fees may be capped at a maximum dollar amount.

As a percentage fees tend to be higher for small short-term loans and lower for large, long-term loans. Fees are set by lenders based on factors like loan risk, processing costs, and market rates.

Accounting Treatment of Loan Fees

Loan fees must be recorded properly in a company’s books. Under GAAP accounting, loan origination fees should be capitalized as an asset and amortized over the loan term.

The initial entry records the fee as a loan processing asset. A series of entries then systematically expenses portions of the asset as amortization expense over the loan period.

This adheres to the matching principle – matching the fee to the period of the loan benefiting from it.

Journal Entries to Record Loan Fees

The exact journal entries depend on the specifics of the loan. But in general, the entries would be:

1. Initial capitalization

Dr. Loan Processing Asset $5,000<br>
Cr. Cash $5,000

Records capitalization of $5,000 fee as asset

2. Periodic amortization

Dr. Amortization Expense $500<br>
Cr. Loan Processing Asset $500

Amortizes $500 of fee to expense for that period

These entries reduce the asset over time while recognizing amortization expense on the income statement for each period.

Financial Statement Reporting of Loan Fees

On the balance sheet, the unamortized loan fee balance is reported as an asset, usually under a line item like “Prepaid expenses” or “Other assets”.

The amortization expense is run through the income statement each period as an operating expense. This accurately represents the utility of the fee over the loan’s lifespan.

Under FASB rules, the fees are directly deducted from the loan balance instead of a separate asset. But the amortization concept remains the same.

What About Upfront Interest and Points?

Two other loan-related fees – interest and points – have different accounting treatment:

• Interest – Recorded as interest expense immediately as incurred

• Points – Capitalized and amortized over loan period like origination fees

It’s important to distinguish these from origination fees that entities capitalize.

Key Takeaways on Loan Fee Accounting

Key takeaways include:

• Origination fees compensate lenders for establishing new loans

• Fees are typically 1% to 10% of the total loan amount

• Origination costs are capitalized as assets and amortized over the loan term

• FASB rules require direct deduction from the loan instead of a separate asset

• Interest and points have different accounting methods

Proper accounting for fees improves accuracy of a company’s income statement and balance sheet. Consult with accounting professionals to ensure proper treatment and disclosure of loan costs.

Example Scenario: Accounting for Loan Fees

Let’s walk through an example scenario to see loan fee accounting in action.

Company ABC takes out a new 4-year business loan for $200,000. The lender charges an origination fee of 2% on the full amount. Here is how Company ABC would account for the fees:

1. Calculate loan fee

Loan amount: $200,000<br>
Fee percentage: 2% <br>
Loan origination fee = $200,000 x 2% = $4,000

2. Initial capitalization entry

Dr. Loan Processing Asset $4,000<br>
Cr. Cash $4,000

Records $4,000 fee as asset on balance sheet.

3. Amortization entries

Dr. Amortization Expense $1,000<br>
Cr. Loan Processing Asset $1,000

Amortizes $1,000 of fee to expense each year for 4 years.

4. Financial statement presentation

Balance Sheet: Loan Processing Asset of $3,000 in Year 1, reducing by $1,000 each year.

Income Statement: Amortization Expense of $1,000 in each of the 4 years.

This matches the fee to the loan term benefiting from the financing.

Alternatives to Capitalization of Fees

Most companies capitalize and amortize loan fees as outlined above, which is acceptable under GAAP. But there are alternatives:

• Expense immediately – Recognize the full fee amount as expense when incurred. More conservative approach.

• Add to loan balance – Tack the fee directly onto the loan balance. Increases the effective interest rate.

• Deduct from loan proceeds – Net the fees from the amount received. No asset account needed.

Companies should follow capitalization method unless they have a justification for an alternative approach.

Importance of Proper Accounting for Loan Fees

Accounting correctly for loan origination fees:

• Accurately matches costs to revenue
• Provides relevant info on profitability
• Presents a faithful measure of assets
• Enhances comparability across periods
• Complies with GAAP principles

Consult with accounting professionals to ensure you account for loan costs appropriately based on the nature of the fees and terms of the debt. This maintains strong financial reporting.

Disclosure Requirements for Loan Fees

Public companies have certain loan fee disclosures under GAAP:

• Accounting policy for recognition of fees
• Amount of costs capitalized for period
• Amortization for period
• Remaining amount of unamortized fees

For credit agreements:

• Effective interest rate after considering fees
• Total fees paid or received for agreements

Consult reporting regulations for required disclosures.

Key Accounting Rules for Loan Fees

FASB and GAAP have issued key accounting standards on loan origination fees:

• FAS 91 – defers and amortizes fees for credit agreements
• ASU 2015-03 – requires direct deduction from the related loan balance
• ASC 310-20 – provides guidance on recognizing fees related to debt
• ASC 835-30 – covers imputation of interest, including fees

Summary of Loan Fee Accounting

When a company takes out a new loan, lenders often charge origination fees to open the loan. The core accounting treatment includes:

• Record fees as assets when incurred
• Amortize cost over the term of the loan
• Recognize amortization on the income statement
• Present unamortized fees on the balance sheet
• Disclose significant loan fees in notes

Following GAAP principles for fee capitalization and amortization provides accurate financial statements. Consulting with accounting professionals can help ensure you properly account for all loan costs.