Are commitment fees Interest expense GAAP?

While Revenue Ruling 81-160 is not explicit on the point, the IRS has held in other contexts that the commitment fees should not be treated as interest expense. Commitment fees, as a cost of acquiring the loan, are amortized over the term of the loan.

What is a commitment fee?

A fee payable by the borrower to the lender under a loan agreement calculated by reference to the amount of the undrawn and uncancelled loan during the availability period. In a syndicated loan, it will be payable to each of the lenders via the agent.

Are commitment fees capitalized?

The changes prescribed under ASU 2015-03 for debt issuance costs associated with term loans and bonds do not apply to commitment fees paid to revolving credit lenders and are still treated as a capital asset. That means that commitment fees continue to be capitalized and amortized as they have been in the past.

Why do banks charge commitment fees?

Why Do Lenders Levy Commitment Charges? This is because, once a lender approves the credit limit, it sets the funds aside for the borrower for future utilization. If the borrower only uses a part of this approved limit, the lender is not able to earn any interest on the remaining amount.

What replaced FASB 91?

FASB Accounting Standards Codification
The SFAS have been superseded by the FASB Accounting Standards Codification (ASC). The codification is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards documents are superseded by the ASC.

How do banks calculate commitment fees?

In the case of a one-time loan, the commitment fee is negotiated between the lender and the borrower. The fee is then calculated by multiplying the average unused commitment by the agreed-upon commitment fee rate and again by the number of days in the reference period.

Are commitment fees refundable?

The commitment fee is generally non-refundable, even if the loan does not close. However, if the proposed loan is to be used to fund an acquisition, the lender should include an indemnity by the borrower to cover any claim by the target company against the lender if the lender does not close the loan.

Do I have to amortize loan fees?

Essentially, the FASB requires that loan origination fees and costs should be deferred and (generally) amortized as a component of interest income over the life of the loan.

How much does it cost to amortize a loan?

Upfront loan costs can include underwriting, origination fees and application fees. Accounting amortizes the fees to spread the expense over the life of the loan. If you have $400,000 in fees on a five-year loan, you amortize one-fifth of the fees, or $80,000, each year. You amortize the loan interest the same way.

How is a commitment fee different from an interest charge?

The key distinction between the two is that a commitment fee is calculated on the undisbursed loan amount while interest charges are calculated by applying an interest rate on the amount of the loan that has been disbursed and not yet repaid.

How are commitment fees classified under Sec 163?

In both cases, the IRS concluded that the commitment fees were deductible under Sec. 162 as business expenses rather than under Sec. 163 as interest. Another type of commitment fee, also referred to as a standby charge, is an upfront amount paid by a borrower for the right to borrow loans over a set term.

Are there loan commitment fees that are deductible?

The treatments of the various fees commonly present in lending facility transactions vary for federal income tax purposes.

How are loan commitment fees related to letters of credit?

In exchange for the right to borrow and draw letters of credit, the borrower paid a facility fees to the lenders. The facility fee was computed with respect to the total available balance that could be drawn under the letters of credit and as loans. The facility fee was not affected by the amount outstanding as loans or letters of credit.