A line of credit, or revolving-debt arrangement, is an agreement that provides the borrower with the ability to borrow money as needed (up to a specified maximum amount), repay portions of its previous borrowings, and reborrow under the same contract. Line of credit and revolving-debt arrangements may include both amounts drawn by the borrower (a debt instrument) and a commitment by the lender to make additional amounts available to the borrower under predefined terms (a loan commitment). Generally, a borrower incurs costs to establish a line of credit or revolving-debt arrangement; some or all of the costs are deferred and amortized over the term of the arrangement.
When a drawn line of credit or revolving-debt arrangement is modified, the borrower should first determine whether it is a troubled debt restructuring (TDR). See FG 3.3
for further information on TDRs.
If the modification is not a TDR, the borrower should apply the guidance in ASC 470-50-40-21
provided the lender before and after the modification is the same.
Excerpt from ASC 470-50-40-21
Modifications to or exchanges of line-of-credit or revolving-debt arrangements resulting in either a new line-of-credit or revolving-debt arrangement or resulting in a traditional term-debt arrangement shall be evaluated in the following manner:
a. The debtor shall compare the product of the remaining term and the maximum available credit of the old arrangement (this product is referred to as the borrowing capacity) with the borrowing capacity of the new arrangement.
b. If the borrowing capacity of the new arrangement is greater than or equal to the borrowing capacity of the old arrangement, then any unamortized deferred costs, any fees paid to the creditor, and any third-party costs incurred shall be associated with the new arrangement (that is, deferred and amortized over the term of the new arrangement).
c. If the borrowing capacity of the new arrangement is less than the borrowing capacity of the old arrangement, then:
1. Any fees paid to the creditor and any third-party costs incurred shall be associated with the new arrangement (that is, deferred and amortized over the term of the new arrangement).
2. Any unamortized deferred costs relating to the old arrangement at the time of the change shall be written off in proportion to the decrease in borrowing capacity of the old arrangement. The remaining unamortized deferred costs relating to the old arrangement shall be deferred and amortized over the term of the new arrangement.
The assessment described in ASC 470-50-40-21
should be made on a lender by lender basis. If a lender exits the line of credit completely, then all unamortized costs associated with that lender should be expensed.
, as amended by ASU 2021-04
, requires that an increase or decrease in the fair value of a freestanding equity-classified written call option held by a creditor that is modified as part of a modification of a line of credit or revolving debt arrangement held by the same creditor be accounted for the same as fees paid between a debtor or creditor.
An increase in the fair value of a freestanding equity-classified written call option held by a third party that is modified as part of a modification of a line of credit or revolving debt arrangements would be accounted for the same as any third-party costs.
Example FG 3-6 illustrates the accounting treatment for unamortized costs and new fees in a modification of a revolving-debt arrangement.
EXAMPLE FG 3-6
Accounting for unamortized costs and new fees in revolving-debt arrangements
FG Corp has a line of credit with a lender. FG Corp decides to modify the line of credit arrangement to extend the term and reduce the commitment amount.
The following table summarizes the terms of the original line of credit and the new line of credit on the modification date.
Original line of credit
New line of credit
Unamortized debt issuance costs
New third party fees
New lender fees
The modification is not a TDR because FG Corp is not experiencing financial difficulties.
How should FG Corp account for the unamortized debt issuance costs related to the original line of credit and the new third-party and lender fees?
To determine the accounting treatment for the unamortized debt issuance costs and new fees, the borrowing capacity of the original arrangement is compared to the borrowing capacity of the new arrangement. Borrowing capacity is calculated as the commitment amount multiplied by the remaining term of the arrangement.
Borrowing capacity on original line of credit
Total commitment amount
Original borrowing capacity
Borrowing capacity on new line of credit
Total commitment amount
New borrowing capacity
The borrowing capacity decreased by $10,000,000, or 33%. Therefore, 33% of the unamortized costs ($66,000) should be expensed in the current period. The remaining unamortized debt issuance costs should be amortized over the term of the new arrangement.
The new lender fees and third-party fees should be capitalized and amortized over four years, which is the term of the new arrangement.