FASB Issues ASU to Simplify Presentation of Debt Issuance Costs

Summary

The FASB has issued an ASU intended to simplify U.S. GAAP by changing the presentation of debt issuance costs. Under the new standard, they will be presented as a reduction of the carrying amount of the related liability, rather than as an asset. The new treatment is consistent with debt discounts. It takes effect retroactively in 2016.

Main Provisions

ASU 2015-03¹ revises Subtopic 835-30² to require that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Prior to the amendments, debt issuance costs were presented as a deferred charge (i.e., an asset) on the balance sheet. The ASU provides examples illustrating the balance sheet presentation of notes net of their related discounts and debt issuance costs.
 
Further, the amendments require the amortization of debt issuance costs to be reported as interest expense, which we believe is largely consistent with current practice. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt. 
 
In the Basis for Conclusions, the FASB observed debt issuance costs that do not have an associated debt liability (for example, costs incurred before proceeds are received on a debt liability) generally are reported as deferred charges (i.e., assets) until the related debt liability is recorded and did not propose a change to this practice.   
 
The standard does not affect the recognition and measurement of debt issuance costs. As such, entities may need to track debt issuance costs separately in order to address other areas of U.S. GAAP such as third-party costs related to a debt restructuring accounted for under ASC 470-50 or the calculation of a beneficial conversion feature in accordance with ASC 470-20.

Effective Date and Transition

The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The amendments are effective for all other entities for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. The amendments must be applied retrospectively. All entities have the option of adopting the new requirements as of an earlier date for financial statements that have not been previously issued. Applicable disclosures for a change in an accounting principle are required in the year of adoption, including interim periods.

 

---

¹ Simplifying the Presentation of Debt Issuance Costs
² Interest—Imputation of Interest