Introduction to Recognition of Fees

The Statement of FASB 91 (Financial Accounting Standards Board), establishes the accounting for non-refundable fees and costs associated with lending or committing to lend at amortised cost.

It requires the non-refundable fees and costs to be netted against each other, and the resulting amount is amortized over the life of the loan based on the Effective Interest Rate (EIR) method.

The Non-refundable fees or associated costs with lending are mostly the loan fees and direct loan origination costs.

Loan fees fall under two categories:

• Origination fees
• Commitment fees

Though the fees are quite different with minor exceptions, they are treated the same by FASB 91, as both the fees are amortised over the term of the loan.

Direct loan origination costs are costs that are directly incurred by the lender for the loan.

Thus, it is imperative for banks to determine the cost and fees that are non-refundable relating to a loan and to account them at amortised cost.

FASB 91 Solution for Banks

The FASB 91 requirement is built above the IA framework with a new module RN. Under the IA framework, financial instruments are measured at Amortised Cost (EIR).

While capturing a loan contract, the contract is entered at the contractual interest rate. However, under IFRS, these contracts are measured at EIR.

There arises a consolidated delta under the Acct Head Type – Amortised between the transaction cost and EIR, which is the difference between amortised cost and the book balance.

The consolidated delta when split between the fees and costs supports in the accounting for the non-refundable fees and costs at amortised cost and is supported only on AA loans.

Product Configuration

The following tables are to be configured:

• Set Split Delta to ‘Y’ on IFRS.ACCURAL.PARAM

  

• IFRS.POSTING.DETAILS – The non-refundable fee and cost is to be defined as Sub Acct Head Type under Amortised.