Future Accounting of Debt Issuance Costs
by Christopher A. Goeman, CPA, Audit Manager
Posted on August 16, 2015
In an effort to reduce the complexity of financial accounting and reporting, FASB has issued Accounting Standards Update No. 2015-03, which simplifies the presentation of debt issuance costs. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements not previously issued.
Debt issuance costs are incurred at the time of issuance including underwriting costs, legal costs, and other direct costs. The costs are amortized over the life of a loan or bond in order to match the costs with the period the organization benefits from the debt.
Currently debt issuance costs should be presented as a deferred charges asset on the balance sheet. The updated standard will require the issuance costs to be deducted from the carrying value of the debt or as a contra liability rather than a separate asset. This treatment is consistent with the reporting of unamortized discounts as direct deductions to the face value of notes. The standard does not change the process for amortizing debt issuance costs.
When the standard is implemented, FASB will require the following disclosures:
- The nature of and reason for the change in accounting principle
- The transition method
- A description of the prior-period information that has been retrospectively adjusted
- The effect of the change on the financial statement line item (that is, the debt issuance cost asset and the debt liability).