Is interest rate cap payment received by the borrower considered income?

[Jason Malabute]

Is interest rate cap payment received by the borrower considered income?

Is the following statement true:

Under Generally Accepted Accounting Principles (GAAP), interest cap premium payments received by the borrower are typically treated as a liability rather than income. Here is a possible journal entry for the borrower when receiving interest cap premium payments:

1. Initial receipt of interest cap premium payment:

   Debit: Cash (or a specific cash account) - Increase the cash asset account

   Credit: Unearned Interest Cap Premium (or a liability account) - Record the liability for the received premium payment

2. Recognition of interest expense over the term of the interest cap agreement:

   Debit: Interest Expense - Recognize the portion of the premium related to each accounting period 

   Credit: Unearned Interest Cap Premium - Reduce the liability account as the premium is recognized as an expense

   When a borrower first buys a cap rate it goes on the balance sheet (asset)  instead of the income statement right?

[Brian Burke]

The payment for the purchase of the cap goes on the balance sheet but is then amortized over the life of the cap. If the residual cap is subsequently sold, the money received is income or capital gain.

While you could certainly do the multi-step journal entry you described, it’s easier to just create a separate expense account for the rate cap payment received. Money received is a negative expense and offsets interest expense. GAAP compliant?  Probably not. But practically, the effect is the same. If you have to do GAAP, fine, but most don’t have to fully comply with GAAP.