You may also be interested in:

Articles

Regulators Clarify How to Disclose Debt-Issuance Costs

  • By Nilly Essaides
  • Published: 6/26/2015

At the June 18 meeting of the Financial Accounting Standards Board’s Emerging Issues Taskforce, officials from the Securities and Exchange Commission offered clarification on how companies should account for the costs of issuing debt.

The issue arose after FASB’s April Accounting Standards Update, which left unclear to treasurers how and whether the rules apply to revolving credit facilities, which are also debt liabilities. At the June EITF, SEC staff announced that it would “not object to an entity deferring and presenting [such] costs as an asset and subsequently amortizing the… costs ratably over the term of the revolving debt arrangement.”

Originally under FASB’s April ASU, an entity must present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. So if the debt’s face value was $10 million and the costs amounted to $50,000, the face value of the debt would be recorded as $9.95 million. Amortization of the costs is reported as interest expense. Under current guidance (i.e., ASC 835-30-45-3² before the ASU), an entity reports debt issuance costs in the balance sheet as deferred charges (i.e., as an asset).

The changes bring U.S. Generally Accepted Accounting Principles into convergence with International Financial Reporting Standards. They also reflect the SEC’s view regarding the treatment of equity issuance costs as a reduction of the gross proceeds of an equity offering. Importantly, the SEC board also clarified that the new language does not apply to revolving debt agreements, according to accounting firm Deloitte.

Costs associated with revolving-debt arrangements

While the announcement clarifies that revolving-debt arrangements are outside FASB’s scope, it does not address whether the ASU’s presentation approach is an acceptable accounting policy for such arrangements and, if so, how an entity should implement such an approach.

Under the ASU, an entity would deduct debt issuance costs from the related debt liability. But it is unclear how the entity would present any remaining unamortized debt issuance costs if it repaid the amounts outstanding under the revolving-debt arrangement and still had an option to make new borrowings under the same arrangement.

In this case, there would no longer be a liability with which to associate the costs. It is also unclear how the entity would present any remaining unamortized costs if the costs exceeded the amount currently outstanding under the revolving-debt arrangement, according to Deloitte.

Given these questions, FASB firm predicts that that “many, if not most, entities will elect to apply the accounting policy outlined by the SEC staff at the June 18, 2015, EITF meeting.” Under that policy, an entity would present the remaining unamortized debt issuance costs associated with a revolving-debt arrangement as an asset, even if the entity currently has a recognized debt liability for amounts outstanding under the arrangement. Further, such costs are amortized over the life of the arrangement even if the entity repays previously drawn amounts.

Showcase Your Expertise
Share your solutions, best practices and big ideas with your treasury and finance community when you lead an educational session at AFP 2019.
Submit Your Proposal

Copyright © 2018 Association for Financial Professionals, Inc.
All rights reserved.