Question

Why would recording revolving line of credit loan as a long-term liability from a business standpoint of view make sense apart from compliance with promulgated standards (GAAP and IFRS standards)?

Answer 1

Loan commitments are legally binding commitments to extend credit to a borrower under certain pre-specified terms and conditions. They have fixed expiration dates and may either be fixed-rate or variable-rate. Fixed-rate loan commitments change in fair value between the commitment date and loan funding as market interest rates and borrower credit spreads change. Loan commitments can either be revolving (in which the amount of the overall line of credit is re-established upon repayment of previously drawn amounts) or non-revolving (in which the amount of the overall line of credit is not re-established upon repayment of previously drawn amounts). Loan commitments can be distributed through syndication arrangements, in which one entity acts as a lead lender and an agent on behalf of other entities that will each extend credit to a single borrower.

GAAP: In contrast, loan commitments that relate to the origination of mortgage loans that will be held for sale are accounted for as derivatives by the issuer (i.e., the potential lender) but not by the holder (i.e., the potential borrower)

IFRS: Loan commitments that are not designated as fair value through profit or loss, cannot be settled net, and do not involve a commitment to provide a loan at a below-market interest rate are not accounted for as derivatives. Loan commitments that can be settled net in cash or by delivering or issuing another financial instrument (other than the loan itself that is the subject of the commitment) are derivatives. A loan commitment is not regarded as being settled net merely because the loan is paid out in installments (e.g., a mortgage construction loan that is paid out in installments in line with the progress of construction). However, a loan commitment is regarded as being able to be settled net when the entity has a past practice of selling the assets (loans in the same class) resulting from its loan commitments shortly after origination.