Are Financing Fees Amortized?

Debt financing fee is amortized over the life of the debt under the GAAP rules. The borrower incurs different types of debt issuing or financing costs.

Let us discuss what are financing costs and how they should be amortized over the period of the debt instrument.

What are Financing Costs?

Financing costs refer to the costs incurred by companies and government entities to raise debt financing. These are the costs related to issuing debt instruments like bonds.

These costs relate to the underwriting of the loan. These are different types of expenses paid to lawmakers, regulator entities, auditors, and investment banks to complete the debt-issuing process.

The financing fee is often referred to as the loan originating fee as well. This fee includes common debt issuing costs like SEC registration fees, legal fees, accounting fees, and other underwriting costs.

Debt issuance here refers to selling debt instruments like bonds and convertible stocks. The loan originating fees or financing fees are paid by the borrower to different parties involved in the process.

How to Recognize Financing Fees?

The generally accepted accounting rules (GAAP) provide guiding rules under ASC 310-20-20.

ASC 310-20-20 defines financing costs as:

  • Incremental direct financing costs paid by the borrower to independent third parties.
  • Certain expenses paid by the lender for different loan-related activities including:
    • Borrower’s financial and credit assessments
    • Preparation of loan processing documents
    • Evaluation of loan guarantees, collateral, and securities.
    • Loan terms negotiating costs.
    • Loan closing costs.

If any of these activities are performed by employees of the borrower as their regular duties, they shall only be considered as part of their remuneration costs.

Direct loan financing cost examples include loan originating fees, commission paid, documentation, legal fees, and loan underwriting fees.

Some examples of indirect loan costs include:

  • Existing loan servicing costs
  • Advertising costs
  • Employee salaries
  • Unsuccessful loan originating costs

The lender can also include financing costs in the account books. ASC 310-20-20 guides on the financing costs recognizable by a lender as:

  • Fees are charged as prepaid interest or to lower the nominal interest rate of the loan.
  • Fees received from the borrower directly related to the loan like faster loan processing fees.
  • Fees charged by a lender for loan financing, refinancing, or restructuring.
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Other direct loan costs charged to the borrower include management, underwriting, processing, and placement costs that would otherwise not incur if not for the particular loan.

Accounting for Financing Costs

The accounting treatment for financing costs including the loan originating fees will depend on the way the debt instrument is treated.

If the debt (bond) held by an entity is classified as an investment for sale it should be recorded at the fair market value. Under ASC 825, the financing costs for such instruments should immediately be expensed.

The net deferred fees and costs for these loans will be deferred until the loan instrument is sold. These costs will not be amortized.

Debt instruments (bonds) held as an investment are treated differently. Debt financing costs for these instruments are amortized under ASC 835 with the interest method.

There are no clear instructions under ASC 835 regarding the length of the amortization. Generally, we can expect the same period for financing cost amortization as the loan repayment term.

Also, the interest method is a preferred method but other amortization methods like the straight-line method are also acceptable. If the entity uses any other method, the resulting amortization amount should not be significantly different from that with the interest method.

First, the debt and debt issuance costs will be recorded. The entity will debit the debt issuance account and credit the accounts payable account to record the transaction.

Due to this contra account adjustment, the debt financing costs will first be recorded on the balance sheet. The asset side of the transaction will be amortized gradually to the expense side.


Suppose ABC company issued a bond to raise debt capital of $ 1 million from the market. The loan originating fee, documentation, and other financing costs were $ 50,000.

Suppose the bond term is 10 years. Therefore, ABC Company will amortize the financing costs over the period of 10 years as well.

If ABC company uses the straight-line depreciation method, then the yearly amortization cost will be $5,000. ($50,000/10=$5,000 yearly).

The journal entry to record the transaction will be:

Cash (net proceeds)$ 950,000 
Loans $ 950,000
Debt Issuance Cost$5,000 
Debt Financing Costs $5,000

The company shall record the net debt principal and interest amounts payable after including the financing amortization costs. Therefore, the amortization charge will also be net zero at the loan maturity date.

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Financing Costs with Line of Credit

Borrowers and lenders can account for the financing costs for a revolving line of credit facility in the same way as outlined above as well.

A lender will recognize the loan originating and financing fee in the income using the straight-line amortization method. The period of the amortization will be as long as the revolving credit is active.

When the revolving facility comes with a fixed schedule and there are no terms and conditions to allow additional borrowings, the lender can use the interest method as well.

Similarly, if the borrower cannot renew the revolving facility and there are unamortized costs, they will be included in the income upon the debt repayment date.

If a revolving facility is later converted into a loan term, the lender will amortize the financing costs during the first phase. After conversion, the unamortized fee and net costs will be adjusted for yield using the interest method.

Financing Costs with Demand Debt

If both parties have an arrangement for a demand debt facility, they’ll recognize financing costs according to ASC 310-20-35-22.

For a demand debt facility, the net fee or financing fee will be adjusted for yield with a straight-line amortization method.

The loan term for such arrangements will be determined by the understanding of both parties. If there is no such understanding, then the lender should estimate a reasonable period and amortize the financing costs accordingly.

In such situations, the lender must revise the demand debt availability period considering different aspects.

Periodic credit card fees should be amortized using the straight-line amortization method. The lender can use the privilege period as the amortization period if there is any significant fee charged.

Originating costs for a credit card should be expensed immediately and not amortized.

Amortization of loan Issuance, Discounts, and Premiums

A debt arrangement can come with a discount or premium as well. If the borrower receives a reduced interest rate from the lender under special circumstances, it will be considered a discount.

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Similarly, the debt arrangement may come with a premium for special services offered by the lender as well. For instance, adjustments to the fair value of the hedging arrangement with a debt instrument.

ASC 835-30-32-2 guides for the accounting treatment of discounts and premiums:

“With respect to a note for which the imputation of interest is required, the difference between the present value and the face amount shall be treated as discount or premium and amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period. This is the interest method.”

In most cases, the amortization period for a discount or premium will be the same as for the debt itself.

Amortization Period for Puttable and Callable Debt

The debt issuance costs will be amortized over the life of the debt it is a puttable instrument. Else, the cost can be amortized for the period between the loan starting date and the date when the debt becomes first puttable.

The premiums and discounts on a puttable debt instrument should be amortized over the life of the debt. The practice is to keep the carrying amount of the puttable debt equal to the put price on a given date.

Without this practice, the borrower will retain the unamortized portion of the financing costs if the lender puts the debt before maturity. There will be no gain or loss if the costs are amortized for the life of the puttable debt as the carrying value and put prices will remain the same.

A callable debt instrument is a short-term financing facility in practice as the borrower can call it at any time. Therefore, the borrower can either amortize the financing costs for such debt instruments for either the estimated or contractual life of the debt.

Either way, the borrower must use the same approach throughout the reporting period. If the estimated period is used, it should be revised periodically to include the best estimate and the correct amortization amount.

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