Entities have new guidance about how to account for debt issuance cost in their financial statements. The Financial Accounting Standards Board (FASB) recently released an accounting standards update (ASU) that requires debt issuance be presented as a direct deduction from the carrying amount of the debt instead of as a noncurrent asset.
The change, made as part of the FASB's Simplification Initiative, brings requirements into line with those of premiums and discounts on debt. ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs makes ASC Subtopic 835-30 consistent with International Financial Reporting Standards, (IFRS), which also presents debt issuance costs as deduction from the carrying amount of the debt.
Under current practice entities are required to present debt issuance costs and debt discounts and premiums differently. Debt issuance costs must be recognized as a deferred charge, while debt discounts and premiums are presented net of the liability for the debt to which they are related. The current presentation is inconsistent with FASB Concepts Statement No.6, Elements of Financial Statements. Debt discounts and debt issuance costs are similar, Statement No. 6 reads, because they reduce the proceeds of the borrowing and increase the effective interest rate. Debt issuance costs also do not meet the traditional definition of assets because they do not provide future economic benefit.
After hearing from stakeholders about the discrepancies in guidance, the FASB added the project to the Simplification Initiative, with the expectation that the final standard would reduce unnecessary complexity in U.S. Generally Accepted Accounting Standards (GAAP) by having two methods of presenting similar transactions. Despite this simplification, entities will still have to separately track debt issuance costs in order to properly apply other accounting guidance, including the guidance on debt modifications and extinguishments.
The change requires the netting of the debt issuance costs against the principal amount of the debt and will result in a reduction of total assets of entities that have capitalized debt issuance costs. Since the FASB did not modify the recognition or measurement criteria for debt issuance costs, the update should not impact an entity's income statement, which generally includes amortizing the issuance costs into interest expense using the effective interest rate method. The requirements for the presentation within the balance sheet and disclosure for debt issuance costs will be the same as for discounts on debt. The balance sheet presentation or disclosures of debt are required to include the principal amount of the debt, the debt issuance costs, and the effective interest rate. Examples of the presentation or disclosure are shown in the Appendix.
Public companies implement the new standard for fiscal years and interim periods beginning after December 15, 2015. All others implement the new standard for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not yet been issued or made available for issuance.
To adopt the standard, entities are required to use a retrospective basis and adjust the balance sheet to account for the specific effects of applying the new guidance. The disclosures for a change in accounting principle will also be required in the initial year of adoption.
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Published on April 14, 2015