Accounting Treatment for a Revolving Credit Arrangement and a Delayed Draw Term Loan
Many organizations are carefully assessing their debt, their debt structure, and the instruments they are using to lower debt costs and take advantage of decreased interested rates. Below is a common scenario which more and more organizations, including healthcare and nonprofit entities, are embracing.
An organization has entered into a revolving credit arrangement or a delayed draw term loan. The agreements have been signed and now it’s time to record the transaction. Do they record the debt as a short-term liability or a long-term liability? And what do they do with the fees incurred? Read on to find out.
Revolving Credit Arrangement
What is Revolving Credit Arrangement?
A revolving credit arrangement allows an organization to borrow money as needed up to the credit limit, repay the amount, and borrow the funds again and again under the same agreement. A revolving credit arrangement is mostly obtained for short-term needs.
Accounting Treatment
The revolving credit would be considered a short-term liability if the revolving credit agreement includes both a subjective acceleration clause and the requirement to have a lock-box arrangement. However, if the written agreement states that the organization has the ability to refinance the obligation on a long-term basis, which the organization plans to execute, then it would be classified as a long-term liability. Further, If the revolving credit arrangement has a term which extend beyond a year from the balance sheet date, the arrangement would be considered a long-term liability. The fees incurred to obtain the revolving credit from the lender would be amortized on a straight-line basis over the term of the arrangement. In recording these fees, if there are borrowings outstanding, a portion of these fees may be a reduction of debt. If there are no borrowings outstanding, the fees would be recorded as another long-term asset. The fees paid to other third-party vendors should be expensed when incurred.
Delayed Draw Term Loan (DDTL)
What is a DDTL?
A DDTL is different from revolving credit because once the DDTL is funded to the organization, it cannot be repaid and then borrowed again. The DDTL agreement states a maximum amount that can be drawn upon over an agreed upon period of time and, therefore, does not get funded in one lump sum. A DDTL is mostly obtained for long-term needs such as acquisitions.
Accounting Treatment
The DDTL would be considered a long-term liability given that the funds are drawn down on over an extended period of time. When an organization enters into a DDTL, a commitment fee is paid to the lender. These fees can either be recorded as an asset or a liability depending on different circumstances. If the organization is expecting to draw down on the debt, then the fees would be considered an asset until the funds are drawn down on. Once either a portion or the full amount of the DDTL is drawn down on, the proportionate amount or the full amount of the commitment fee would be derecognized as an asset and recognized as a liability and amortized over the term of the debt as a component of the debt’s effective yield. If the organization is not expecting to draw down the debt, the commitment fee would be recognized on a straight-line basis over the access period of the DDTL. Fees paid to other third-party vendors should be expensed when incurred.
Conclusion
If an organization finds itself considering these financing arrangements, understanding the accounting treatment and its impact on the organization’s financial statements prior to signing the documents may be helpful.
If you have questions about the information outlined above, McKonly & Asbury’s experienced professionals are here to help. Learn more about our Healthcare practice by visiting our Healthcare industry page or by contacting the director of our Healthcare practice, Janice Snyder, Partner.
About the Author

Kady joined McKonly & Asbury in 2016 and is currently a Manager with the firm. As a member of the Audit & Assurance Segment, she focuses on providing client services, particularly in the areas of healthcare entity audits and single… Read more