Reporting Requirements for Annual Financial Reports of State Agencies and Universities

General Accounting

Loan Programs
Loan Costs

This section covers nonrefundable fees and costs related to lending activities and loan purchases. The following are constituted as lending activities:

• Lending
• Committing to lend
• Loan refinancing or restructuring
• Arranging standby letters of credit
• Lease activities

The activities by the lender prior to disbursing its resources generally fall under the following two categories:

• Identifying and attracting potential borrowers
• Taking the necessary steps to originate a loan or loan commitment after the borrower has requested for the loan or loan commitment

Nonrefundable fees are also known as:

• Origination fees
• Points
• Placement fees
• Commitment fees
• Application fees
• Management fees
• Restructuring fees

State agencies may acquire a loan by either lending (originating the loan) or by purchasing (acquiring from someone other than the borrower). This section only applies to individual loan contracts. When similar loans are aggregated in order to recognize net fees and costs along with purchase premiums or discounts, the following provisions must be met:

• Use the payment terms required by the loan contract to calculate the constant effective yield that allows the use of the interest method.
• Do not shorten the loan term to anticipate prepayments of the principal.
• Recalculate the effective yield if there is a difference between the expected prepayments and actual prepayments (so that payments to date and expected future payments are more accurately reflected when applying the interest method).
• Adjust the net investment to the amount that would have resulted if the new effective yield was applied when the loans were acquired. Adjust the investment in the loans to the new balance and the applicable charge or credit to interest revenue.

Loan Origination Fees and Costs

GASB 62, paragraphs 434–436, defines loan origination costs as either direct or indirect:

• Direct loan costs are incremental direct costs of loan origination resulting from dealings with independent third parties for that loan and various direct costs from specific activities of the lender for that loan, where specific activities include:
  • Evaluating the prospective buyer’s economic condition, evaluating and recording guarantees, collateral and other security arrangements.
  • Negotiating loan terms, preparation and processing of loan documents and finalizing the transaction.
  • Considering only the time directly spent performing such activities when allocating the salary and payroll-related benefits to the direct costs.
  • GASB 65 requires direct loan origination costs to be recognized as an expense in the period incurred.
• Indirect costs are administrative costs, rent, depreciation and all other occupancy and equipment costs. GASB 62 requires these types of costs to be charged to expense as incurred.
• Expense the remaining costs related to lending. These include costs of lender’s activities (such as advertising, attracting borrowers, servicing existing loans, monitoring credit policies, supervision and administration).
• Loans held for investment — Recognize loan origination fees as revenue (excluding any fees related to points) in the period received. Report points received as deferred inflows of resources and recognize revenue in a systematic and rational manner over the loan term. Also recognize the expense for direct loan origination costs in the period incurred.
• Loans held for sale — Until the loan is sold, report deferred inflows for all loan origination fees (including points) and deferred outflows of resources for direct loan origination costs. Once the loan is sold, recognize revenue (in the period of sale) for the amount reported as deferred inflow of resources related to the direct loan origination fees (including points) and recognize expense for the amount reported as a deferred outflow of resources related to direct loan origination costs.

Commitment Fees and Costs

Record fees received for a commitment to originate or purchase a loan (or group of loans) as a liability. If the commitment is exercised, recognize the fees as revenue in the period exercised. If the commitment expires unexercised, recognize the fees as revenue upon expiration, unless the following applies:

• If the state agency’s history with such arrangements implies that there’s a remote chance for the commitment to be exercised, recognize the commitment fee as revenue in the period received.
• If the amount is determined retrospectively as a percentage of the available line of credit that had not been used and that the percentage is nominal related to the stated interest on the borrowing, recognize the commitment fee as service fee revenue on the date of determination.

Refinancing or Restructuring Fees and Costs

Unless dealing with troubled debt restructuring, treat the refinanced loan as a new loan if the loan’s effective yield after the refinancing is (at a minimum) as favorable to the lender as the effective yield for comparable loans to other customers with similar collection risks who do not have a refinanced or restructured loan. When the loan is granted:

• Recognize any unamortized net fees or costs and prepayment penalties of the original loan as interest revenue.

  –OR–

• Recognize the new loan’s investment of the remaining net investment in the original loan plus additional amounts loaned, fees received and direct origination costs resulting from the refinancing or restructuring.

Purchase of a Loan or Group of Loans

GASB 62, paragraph 442, establishes procedures on accounting for the difference between the purchase price and the principal amount of a purchased loan or group of loans. GASB 66 supersedes GASB 62, as a result, the purchase of a loan or group of loans is reported at its purchase price.

The provisions of GASB 62, GASB 65 and GASB 66 relating to a group of purchased loans allow the state agency to allocate the initial investment to the individual loans or to the combined group of loans by:

• Including the amount and fees paid minus fees received when the initial purchase of a loan or group of loans is made.
• Using the cash flows from the underlying loans contracts to apply the interest method unless provisions in the loan contract apply.
• Recognizing the proportionate share of unearned fees and purchase premium or discount on the operating statement in order to leave the effective interest rate on the remaining portion unchanged. This recognition only occurs if the prepayments are not expected but they occur, or the loan is partially sold.
• Recognizing all other fees paid for any fees received that were related to the purchase of a loan or group of loans as an expense or revenue in the period incurred.

Application of the Interest Method and Other Amortization Matters

The objective of the interest method is to arrive at periodic interest revenue at a constant effective yield, applied (per GASB 62, paragraphs 445–447) as follows:

• Use the interest method to recognize net fees or costs that are required to be recognized as yield adjustments over the loan’s lifetime unless one of the following provisions apply:
  • If net fees or costs for demand loans may be recognized as an adjustment of yield on a straight-line basis over a period consistent with the agreement between the borrower and the lender — then recognize the unamortized amount when the loan is paid in full.

    –OR–

  • If the borrowings are outstanding for the maximum term of the contract — then recognize the net fees or costs for loans with revolving lines of credit in the flows statement on a straight-line basis over the timeframe the line of credit is active.
• Apply the interest method when the stated interest rate is not constant for the duration of the loan by:
  • Not recognizing interest revenue to the extent where net investment in the loan would be greater than the obligation’s settling amount for the borrower if the loan’s stated interest rate increases during the term of the loan.
  • Recording deferred inflows of resources and recognizing this excess in those future periods when the stated interest rate exceeds the constant effective yield calculated under the interest method.
  • Calculating the constant effective yield necessary to recognize the fees and costs by using the effective factor at the loan’s inception or, if the loan is a variable-rate loan, the one that changes over the duration of the loan.
• Any fee paid or any fee received related to a purchase of a loan or group of loans is recognized as an expense or revenue, respectively, in the period the loan (or group of loans) was purchased.

Statement of Net Position Classification

Report the unamortized balance of the following as part of the loan balance on the statement of net position (per GASB 62, paragraph 448):

• Loan origination, commitment and other fees and costs
• Purchase premiums and discounts being recognized as an adjustment of yield

Operating Statement Classification

Report amounts of loan origination, commitment and other fees and costs recognized as an adjustment of yield as part of interest revenue. Report the amortization of other fees (such as commitment fees that are being amortized on a straight-line basis over the commitment period or included in revenue when the commitment expires) as service fee revenue (per GASB 62, paragraph 449).

Application to Leasing Activities

To determine the net amount of initial direct costs, please see Loan Origination Fees & Costs and Commitment Fees & Costs sections mentioned above. These costs are accounted for as part of the investment in a direct financing lease by the lessors (per GASB 62, paragraph 450).