In 2015, the FASB changed the requirements for presentation of issuance costs associated with debt. These updates were made as part of FASB’s initiative to reduce complexity in accounting standards and went into effect in 2016. Debt issuance costs consist of brokerage, legal and other professional fees incurred in connection with issuance of long-term debt. Prior to this change, debt issuance costs were capitalized and deferred as a separate asset on a company’s balance sheet. However, this was different than the guidance under International Financial Reporting Standards (IFRS) and also conflicted with the guidance in FASB’s Superseded Concepts Statement No. 6: Elements of Financial Statements, which stated that debt issuance costs provide no future economic benefit and should not be categorized as an asset.
Accounting Standards now require debt issuance costs to be treated as a reduction of the carrying amount of debt, similar to how debt discounts are treated. This just changed the presentation in the balance sheet and the recognition and measurement guidance for debt issuance costs were not affected. Amortization of debt issuance costs continue to be reported as a component of interest expense. This presentation is also consistent with the accounting treatment for issuance costs associated with equity instruments.
Additional guidance was given to cover the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. While this update provides guidance to SEC members, most private companies follow this guidance as well, as SEC guidance has traditionally been followed by private companies when there is a lack of explicit guidance in Accounting Standards. This guidance states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
The treatment can be pretty clear-cut when they are incurred with a single debt issuance or the consummation of a line-of-credit arrangement. However, private companies often enter into a larger credit agreement, which contain both a line-of-credit component as well as term debt and will incur issuance costs in connection with the overall credit arrangement. In these situations, judgment will be needed in order to determine which debt issuance costs are applicable to term notes, which need to be shown as a reduction of the associated debt.
Jonathan M. Poppel, CPA