![]() ![]() Look at the below table which shows the offers received from two different banks – Let’s understand the PROCESSING FEES and let’s have only practical thoughts about why it is being charged and how it is being treated in current accounting system Vs. Reader would appreciate that these practices are being followed by the entities which uses IFRS around the world and materiality could be considered while formulating any such process change within any entity. ![]() However there could be other situations where it has been established that this facility will not be drawn down then this commitment fees can be recognized as revenue based on any systematic allocation (could be straight lined) over the period of such commitment,.Now, if there is a practice (a probability can be established) to draw down the loans over the period for which such commitment has been made between lender and borrower, then assuming that this is not covered under derivatives definition then such commitment fees will become part of the calculation of Effective Interest Rate (in simple terms EIR can be understood as normal IRR for any series of installments),.those cases where it is a practice to sell these commitment frequently then it will be covered under derivatives and would be accounted at Fair value at its initial recognition and marked to market accounting will be done for all subsequent periods (Normal derivative accounting which is being done for any other derivative), Loan commitment (fees related to such loans) which are in nature of derivatives e.g.(c) Commitments to provide a loan at a below-market interest rate (see paragraph 4.2.1(d)).Ĭommitment fees is therefore a fees/ charges which are being taken by a lender (a bank) to provide a choice or an option to draw down additional bank facility (whatever is agreed) at the same terms which has agreed and It gives kind of assurance to a borrower about certain environment/ charges to be incurred without affecting any change in future economic environment. A loan commitment is not regarded as settled net merely because the loan is paid out in installments (for example, a mortgage construction loan that is paid out in installments in line with the progress of construction). (b) Loan commitments that can be settled net in cash or by delivering or issuing another financial instrument. An entity that has a past practice of selling the assets resulting from its loan commitments shortly after origination shall apply this Standard to all its loan commitments in the same class. (a) Loan commitments that the entity designates as financial liabilities at fair value through profit or loss (see paragraph 4.2.2). Ind-As 109 – “Financial Instruments” para 2.3 talks about the loan commitment which are within the scope of Financial Instruments-Ģ.3 The following loan commitments are within the scope of this Standard: Let’s first understand COMMITMENT FEES which are being charged on account of certain arrangement between bank and a borrower to draw down certain facility in future or whenever it is agreed based on the agreed terms and conditions agreed initially. ![]() Rader can download/ refer the full annual report of the Bank by using link. from 2018 as notified by MCA) as mentioned on page 137 of the report. Refer below some of the extracts governing accounting policies on such issues of by one of private sector bank (listed in India) which uses current accounting practices (as Ind-As will be applicable on Banks w.e.f. Banks are usually charged for some fees to provide this kind of facility which is usually called commitment charges/ fees.Īnd “Loan processing fees” are something which once can understand that the amount of upfront charges/ payments which are being recovered by a Bank at the time of disbursing the loan (net of loan) to the borrower which usually been called as facility/ or arrangement fees etc. In general terms one can understand that a “Commitment fees” is being charged for some approved facility which can be drawn down in future at the same terms which has been agreed initially between lender and borrower. ![]()
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