Overview of Line of Credit Fee Accounting
When there is a revolving line of credit (where the borrower can make multiple borrowings up to a predetermined maximum loan amount), the lender recognizes the associated net fees or costs in income on a straight-line basis over the period of the line of credit. If the borrower cannot reborrow from the line of credit upon paying off the line, recognize all remaining net fees and costs as of the payment date.
If the line of credit includes a payment schedule, then account for the remaining net fees and costs as a yield adjustment over the remaining life of the loan.
Example of Line of Credit Fee Accounting
Currency Bank enters into a one-year line of credit arrangement with a borrower, where the borrower can elect to convert the line of credit into a three-year term loan. Currency amortizes the net fees and costs associated with the line of credit over the combined period of the line of credit and term loan. The borrower elects to let the line of credit expire and pays off the remaining balance, without converting to a term loan, so Currency recognizes the remaining unamortized net fees and costs as of the expiration date.