In an ongoing effort to reduce the complexity of accounting standards, the FASB issued guidance which will alter the way debt issuance costs are recorded. This update will require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, and no longer recording these costs as assets.
ASU No. 2015-03 (Subtopic 835-30): Interest – Imputation of Interest is effective for annual periods beginning after December 15, 2015. Early adoption is permitted.
Details of the ASU
The FASB received feedback that having different balance sheet presentation requirements for debt issuance costs and debt discounts and premiums creates unnecessary complexity in applying the accounting standards. The Board also concluded that capitalizing debt issuance costs is inconsistent with FASB Concepts Statement No. 6, Elements of Financial Statements, which defines an asset as something that provides a future economic benefit. Furthermore, the previous method where debt issuance costs were recorded as assets was inconsistent with guidance in the International Financial Reporting Standards (IFRS).
As a result, the FASB issued this update which will, in effect, reduce the face amount of the borrowing by the debt issuance costs associated with the borrowing. The recognition and measurement guidance for the debt issuance costs themselves is not affected by this update. The amortization of debt issuance costs will be recorded as interest expense over the life of the corresponding note.
Disclosure Considerations for Private Companies
This update was issued to provide simplification and consistency to worldwide accounting standards, which is an ongoing initiative of the FASB. The components of assets and liabilities will be affected by this guidance; however, there will be no impact to net assets. For financial statement disclosure purposes, the preparer must disclose the face amount of the note, either as a caption on the face of the balance sheet or in the notes to the financial statements. Additionally, the effective interest rate must be disclosed, which was previously a requirement, however, this rate will now increase due to the deduction from the face amount of the note for the related debt issuance costs.
In the year of transition, an entity should apply this guidance retrospectively to all periods presented in the financial statements. Additionally, an entity should disclose the following:
- 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 debt liability)