No. 2015-22
Updated 6 August 2015
To the Point
FASB — final guidance
Simplifying the presentation of debt
issuance costs
This standard is
part of the Board’s
simplification
initiative and aligns
the presentation
guidance in
US GAAP and IFRS.
What you need to know
•
The FASB issued final guidance that requires debt issuance costs related to a
recognized debt liability to be presented in the balance sheet as a direct deduction
from the debt liability rather than as an asset.
•
The standard aligns the US GAAP guidance on balance sheet presentation of debt
issuance costs with IFRS.
•
This publication has been updated to reflect an SEC staff member’s comment in June
2015 that the staff will not object to an entity presenting the cost of securing a
revolving line of credit as an asset, regardless of whether a balance is outstanding.
•
For public business entities, the final guidance will be effective for fiscal years beginning
after 15 December 2015, and interim periods within those fiscal years. For all other
entities, the final guidance will be effective for fiscal years beginning after 15 December
2015, and interim periods within fiscal years beginning after 15 December 2016.
Overview
The Financial Accounting Standards Board (FASB or Board) issued final guidance 1 to simplify
the presentation of debt issuance costs by requiring debt issuance costs to be presented as a
deduction from the corresponding debt liability. This will make the presentation of debt
issuance costs consistent with the presentation of debt discounts or premiums.
The new guidance is part of the Board’s broader simplification initiative to reduce the cost and
complexity of financial reporting through narrow projects that it can finish relatively quickly.
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Key considerations
Current guidance generally requires entities to capitalize costs paid to third parties that are
directly related to issuing debt and that otherwise wouldn’t be incurred (e.g., legal fees,
printing costs) and present those amounts separately as deferred charges (i.e., assets).
However, the discount or premium resulting from the difference between the net proceeds
received upon debt issuance and the amount payable at maturity is presented as a direct
deduction from or an addition to the face amount of the debt.
Presenting debt issuance costs as assets is inconsistent with FASB Concepts Statement No. 6,
Elements of Financial Statements, which states that debt issuance costs cannot be assets
because they provide no future economic benefit. Current guidance also conflicts with IFRS,
which requires transaction costs, including third-party costs and creditor fees, to be deducted
from the carrying value of the financial liability and not recorded as a separate asset.
The new US GAAP guidance simplifies financial reporting by eliminating the different presentation
requirements for debt issuance costs and debt discounts or premiums. It also addresses the
long-standing conflict with the conceptual framework and improves consistency with IFRS.
The Board decided not to address the presentation of debt issuance costs incurred before an
associated debt liability is recognized (e.g., costs incurred before the proceeds are received or
in connection with an undrawn line of credit). The Board observed that entities typically defer
these costs and apply them against the proceeds they eventually receive, consistent with the
accounting treatment for issuance costs associated with equity offerings.
SEC staff view on debt issuance costs for revolving credit lines
A Securities and Exchange Commission (SEC) staff member said in the June 2015 meeting of
the Emerging Issues Task Force that the SEC staff will not object to an entity presenting the cost
of securing a revolving line of credit as an asset, regardless of whether a balance is outstanding.
The comment came in response to questions that arose after the standard was issued in April
2015. The standard doesn’t address the presentation of costs related to revolving lines of
credit, which may not have outstanding balances or may have fluctuating balances as entities
borrow and repay amounts.
An entity that repeatedly draws on a revolving credit facility and then repays it could present the
costs as an asset and reclassify all or a portion of them as a direct deduction from the liability
whenever a balance is outstanding. The SEC staff member’s comment provides a less cumbersome
alternative. Either way, the costs should be amortized over the term of the arrangement.
How we see it
• The SEC staff’s view does not affect the presentation of costs incurred before an
associated liability is recognized in other situations. For example, an entity may incur
costs to secure a term debt credit facility where the entity does not have outstanding
borrowings at inception. In these situations, we generally believe entities should present
the costs as an asset and reclassify all or a portion of them as a direct deduction from the
liability when a balance is drawn.
• Although the SEC staff didn’t comment on this, we generally believe it is not appropriate
to present debt issuance costs as a contra-liability when there is not an associated debt
liability (e.g., before amounts are drawn from a revolving line of credit).
2 | To the Point Simplifying the presentation of debt issuance costs Updated 6 August 2015
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Recognition and measurement guidance unchanged
The new guidance is limited to simplifying the presentation of debt issuance costs. The
recognition and measurement guidance for debt issuance costs is not affected. Therefore, these
costs will continue to be amortized as interest expense using the effective interest method
pursuant to Accounting Standards Codification (ASC) 835-30-35-2 through 35-3. Also, the
treatment of debt issuance costs in measuring beneficial conversion features in ASC 470-20 2
and in accounting for debt modifications and extinguishments in ASC 470-50 3 will not change.
In addition, we do not expect the new guidance to change the current practice of excluding debt
issuance costs from the evaluation under ASC 815 4 of whether certain redemption features
involve a substantial discount or premium and are clearly and closely related to a debt host.
How we see it
To meet these other measurement and recognition requirements in US GAAP
(i.e., ASC 470 5 and ASC 815), entities will still need to track debt issuance costs
separately from debt discounts.
Effective date, transition and disclosure
The new guidance
affects only the
presentation of
debt issuance costs,
not recognition
and measurement.
The guidance is effective for public business entities for financial statements issued for fiscal
years beginning after 15 December 2015, and interim periods within those fiscal years. For
all other entities, it is effective for financial statements issued for fiscal years beginning after
15 December 2015, and interim periods within fiscal years beginning after 15 December 2016.
Early adoption is permitted.
Upon adoption, an entity must apply the new guidance retrospectively to all prior periods
presented in the financial statements.
An entity is also required in the year of adoption (and in interim periods within that year) to
provide certain disclosures about the change in accounting principle, including the nature of
and reason for the change, the transition method, a description of the prior-period information
that has been retrospectively adjusted and the effect of the change on the financial statement
line items (that is, debt issuance cost asset and the debt liability).
Endnotes:
1
2
3
4
5
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© 2015 Ernst & Young LLP.
All Rights Reserved.
SCORE No. BB2963
(Revised 6 August 2015)
ey.com/us/accountinglink
Accounting Standards Update 2015-03, Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the
Presentation of Debt Issuance Costs.
ASC 470-20, Debt — Debt with Conversion and Other Options.
ASC 470-50, Debt — Modifications and Extinguishments.
ASC 815, Derivatives and Hedging.
ASC 470, Debt.
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3 | To the Point Simplifying the presentation of debt issuance costs Updated 6 August 2015