Line of Credit Fee Accounting

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Line of Credit Fee Accounting

Overview of Line of Credit Fee Accounting

An entity may arrange with its lender to alter the terms of its line of credit or revolving debt. The result may be a new agreement or a traditional term-debt arrangement. The accounting for the change differs, depending on the following scenarios:

Greater borrowing capacity. If the borrowing capacity of the new arrangement is greater than or equal to that of the old arrangement, then associate any unamortized deferred costs related to the old arrangement with the new arrangement.
Lower borrowing capacity. If the borrowing capacity of the new arrangement is less than that of the old arrangement, then write off any unamortized deferred costs related to the old arrangement in proportion to the decrease in borrowing capacity from the old arrangement. Amortize the remaining amount over the term of the new arrangement.

Example of Line of Credit Fee Accounting

Tallahassee Trailers has a $10 million, three-year line of credit with its bank, of which one year has been completed. Given a decline in Tallahassee’s financial situation, the bank presses for a reduced borrowing capacity. The parties agree to a revised line of credit having a maximum borrowing capacity of $5 million, and the remaining term is still two years. There are $40,000 of unamortized costs associated with the original line of credit. There has been a 50 percent decline in borrowing capacity from the original arrangement, so Tallahassee writes off half of the $40,000 of unamortized costs associated with the original line of credit, and amortizes the remainder over the two-year term of the new arrangement.