Thus, the right accounting treatment would be to recognize the loan servicing fees received up front as a contract liability under IFRS 15 and subsequently, derecognize the contract liability over the life of the loan. The reason is that under IFRS 15, you have to recognize them as revenue when you meet the performance obligation – in this case, when you service the loan, over the life of the loan. It can happen that the loan servicing fees are charged up front in one sum at the time of generating the loan.īut, you still cannot recognize them straight in profit or loss at the time of charging them. The loan servicing fees are NOT the part of the loan’s initial measurement, but these are accounted fr in line with the standard IFRS 15 Revenue from contracts with customers. It seems that the bank from today’s question charged loan application fees to partially cover its expenses related to loan generation and loan servicing, too. These fees are charged usually throughout the life of the loan for the administrative aspects for the loan, like fees for sending monthly payment statements, collecting the payments, maintaining the records and other items. The bank usually charges these fees to cover its costs for evaluating the borrower’s financial condition, for assessment of guarantees or collateral, negotiating the terms of the loan, preparing the loan contract and other similar activities.In other words, origination fees cover the activities that result in creating the loan.
Here, focus on what the customer gets for these costs or what service is delivered to the customer.ĭo NOT look at what own expenses the bank wants to recover by charging those fees – like security cost, cost of running the branch, etc. Now, we need to distinguish what the transaction fees are received for. In most cases, they are included in the effective interest rate calculation, but yes, you can use alternative method of amortization. Subsequently, you should amortize these fees or costs over the expected life of the loan. So, it is clear that if the loans are at amortized cost category, then the transaction costs enter into the initial measurement. Well, you can learn more about the classification of loans in the podcast episode n. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Click here to check it out! Have you already checked out the IFRS Kit ? It’s a full IFRS learning package with more than 40 hours of private video tutorials, more than 140 IFRS case studies solved in Excel, more than 180 pages of handouts and many bonuses included. I guess most of the retail loans provided by banks to the customers is indeed measured at amortized cost, because they usually meet the two criteria for amortized cost measurement. If you classify the financial asset at fair value through other comprehensive income or at amortized cost, then the transaction costs enter into the initial measurement of the financial asset.If you classify the financial asset at fair value through profit or loss, then you must recognize the transaction costs in profit or loss when they arise.
Here, I’m going to focus on financial assets, because the question relates to the bank providing a loan, thus generating financial assets: This is fully recognised as income in profit or loss because management states that it is directly linked to freely transacting via Bank’s agent network across the country along with administrative fees limited to cost of stationeries, credit checks, security and business appraisal.įirst of all, the treatment of all these transaction costs depends on how you classify the financial instrument. Currently we are using straight-line as an alternative for effective interest method, and Loan Origination Fee of 1 % is amortized over the loan period.However such fee is divided into two categories: “I work for a banking industry and my bank is charging a fee of 3% for each loan issued to customers on some of loan categories.