Hello Ashok and team I would like to example the buydown subject using more business narrative and terms of lending than accounting. Hopefully, that makes it more relatable and easier to understand impacts and then determine if methods mentioned are suitable.
There are 2 types of buydowns, *Permanent Buydowns* (Buying the Rate Down for the Life of the Loan): Example: 5 year loan with a non-refundable 5% fee deducted from the loan proceeds. Often called "discount", accounting standards should accommodate both US and International practices. Under GAAP / ASC rules, these fees are amortized as income over life of loan. These fees are generally considered origination fees or loan fees. From an accounting perspective for the lender, these fees represent a reduction in the effective interest rate of the loan. They typically are *amortized over the life of the loan* as an adjustment to the yield, rather than being recognized as immediate revenue. ASC 310-20-25-2 *Temporary Buydowns* (Applied Directly Against Future Payments): Example: 7 year loan and an interested party buys down the payment for the first 2 years to make the consumer's payments more affordable. In this scenario, the lender escrows the funds (custodial account) and does NOT "own" the buydown funds. They are for the benefit of the consumer, therefore a liability account. Each payment is subsidized / reduced by the buydown fund and the custodial fund is reduced by the same amount as contributed to the payment. The received payment is accounted as a normal payment received with no other "special" treatment, just as though the consumer made a full payment and the interest is recognized as income. ASC 310-20-25-2, ASC 310-10, ASC 405-20 *RECOMMENDATION:* When we speak accounting, cites should be used so that the community can validate and confirm agreement with interpretation. While my knowledge is based on US / GAAP / ASC standard, it is my belief that IFRS 9 common to Europe, Asia, Africa use the same approach and both GAAP / ASC and IFRS 9 are fully compatible in this treatment. On Thu, Jul 17, 2025 at 10:28 PM Ashok <ashoku...@gmail.com> wrote: > Hi team, > >> >> I’ve reviewed the accounting entries for the Buy-Down Fee feature >> (FINERACT-2311 https://issues.apache.org/jira/browse/FINERACT-2311 ) and >> would like to suggest the following corrections to align with standard >> accounting practices: >> >> --- >> >> 1. *At Disbursement* >> >> *Current*: >> DR: BuyDown Expense (Expense) >> CR: Deferred Income (Liability) >> >> *Suggested*: >> DR: Cash or applicable Asset Account (Asset) >> CR: Deferred Income (Liability) >> >> *Reason*: The buy-down fee is received by the institution. If collected >> upfront, it should be recorded in Cash. If collected later, it should be >> posted to a Receivable or net-off account. >> >> --- >> >> 2. *At Loan Charge-Off* >> >> *Suggested*: >> DR: Deferred Income (Liability) >> CR: Buy-Down Fee Reversal (Income) >> >> *Reason*: Any unearned portion of the buy-down fee should be reversed >> when the loan is charged off to avoid recognizing future income. >> >> --- >> >> 3. *Adjustment to Buy-Down Fee* >> >> *Suggested*: >> DR: Deferred Income (Liability) >> CR: Cash or applicable Asset Account (Asset) >> >> *Reason*: If the fee amount is corrected after disbursement (e.g., due >> to a merchant dispute), the adjustment should reverse part of the original >> asset entry, not affect income. >> >> --- >> >> These changes will help ensure accuracy in accounting and consistency >> with how the buy-down fee is operationally collected and tracked. >> >> Happy to connect and provide further clarification on these accounting >> entries if needed. >> >> >> Regards, >> Ashok >> > -- -- Paul
