In April 2015, as a part of the FASB’s initiative to simplify and improve accounting standards, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. Why should we care about an Accounting Standards Update issued two years ago? Because for privately held companies and not-for-profit organizations, ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015. In other words, the changes were effective for organizations with calendar year-ends at December 2016. The changes will also now be effective for organizations with year-ends of June 2017 and September 2017. Although early-implementation was optional upon the issuance of the Accounting Standards Update, changes are now required to be made.
What has changed as a result of ASU 2015-03? Previously, debt issuance costs have been capitalized and presented as an asset. This asset is netted with accumulated amortization as the costs are amortized over the term of the loan. However, to be classified as an asset, costs must provide a future economic benefit. Because debt issuance costs do not meet this definition, and should instead be considered a reduction in the related liability, the FASB has determined that these costs should be reclassified
As a result of the update, debt issuance costs will now be presented as a contra-liability. On the balance sheet or statement of financial position, long-term debt will include the balance due, netted with debt issuance costs and the related accumulated amortization of the debt issuance costs. Each of these components will be broken out and disclosed in the footnotes. Additionally, the amortization of the debt issuance costs will not be classified as amortization expense, but rather as interest expense.
The changes must be applied retrospectively to all periods presented in the financial statements, meaning that these changes should be applied to debt issuance costs previously presented as assets, not just debt issuance costs for new debt.
Paul Biggs, CPA