Q: Could you review the amortization of loan fees?
A: Many lenders charge a fee in conjunction with extending credit. The fees are paid at the time of the financing but are used up, amortized, over the life of the loan.
If the loan is a short-term loan, a borrower recognizes the loan fee in the year in question, i.e., it becomes an expense that year. If the loan is a term loan, the loan fees are matched against the life of the loan, i.e., the cost is stretched out over the life of loan (but, in general, never longer than five years). The loan fee is essentially a long-term prepaid expense.
For example, if the fee were $10,000 for a five-year long-term debt, the borrower would book $2,000 as an expense this year and post the remaining $8,000 on its balance sheet as an intangible asset, and then expense $2,000 per year over the remaining four years of the loan (a debit to amortization expense and a credit to loan fees).
The lender receiving the cash payment for loan fees associated with a term loan is obligated to take the same approach. That is, it takes the cash payment into income over the life of the loan (again, in general, never longer than five years) rather than booking the full amount upon receipt as revenue. The loan fee amount is booked in a deferred revenue account that is then reduced year by year by a debit entry to deferred revenue (or to a similar account) and a credit entry to loan fee revenue until the balance is exhausted.
Course overview: Financial Statement Structure and Composition