The change also aligns US GAAP with IFRS in this regard: Concepts Statement 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. 6, Elements of Financial Statements, which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. The Board received feedback that having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity.Ĭonceptually, since debt issuance fees provide no future economic benefit, treating them as an asset prior to the update conflicted with the basic definition of an asset:Īdditionally, the requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts Statement No. The new rules now align with FASB’s own rules for debt discounts ( OID) and premiums (OIP) as well as with IFRS treatment of debt issuance costs. Prior to the update, debt issuance costs were treated as an asset while debt discounts and premiums directly offset the associated liability: The purpose of the change is part of a broader effort by FASB to simplify its accounting rules. That means that commitment fees continue to be capitalized and amortized as they have been in the past. That’s because FASB views the commitment fee as representing the benefit of being able to tap the revolver in the future, as opposed to a third-party related fee with no discernible long-term benefit. The changes prescribed under ASU 2015-03 for debt issuance costs associated with term loans and bonds do not apply to commitment fees paid to revolving credit lenders and are still treated as a capital asset. Revolver C ommitment Fees are Still Treated as a Capital Asset Below is the accounting at the borrowing date:įinancing Fees: Accounting Journal Entry (Debit and Credit)īelow are the journal entries laid out explicitly over the next 5 years: Financing Fees Calculation ExampleĪ company borrows $100 million in a 5-year term loan and incurs $5 million in financing fees. Financing Fees Calculator – Excel Template Below is an example of debt issuance costs treatment pre- and post-ASU 2015-03. The update impacts both private and public companies and applies to term loans, bonds and any borrowing that has a defined payment schedule. This does not change the classification or presentation of the related amortization expense, which over the term of borrowing will continue to be classified within interest expense on the income statement:Īmortization of debt issuance costs shall be reported as interest expense – Source: FAS ASU 2015-03 Debt Issuance CostsĬompanies will thus report debt figures on their balance sheet, net of debt issuance costs, as you see below for Sealed Air Corp: To simplify presentation of debt issuance costs, the amendments in this Update 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, consistent with debt discounts. Effective December 15, 2015, an asset will no longer be created, and the financing fee will be deducted from the debt liability directly as a contra-liability: In April 2015, FASB issued ASU_2015-03, an update that changes how debt issuance costs are accounted for. Prior to April 2015, financing fees were treated as a long-term asset and amortized over the term of the loan, using either the straight-line or interest method (“deferred financing fees”). These are fees paid by the borrower to the bankers, lawyers and anyone else involved in arranging the financing. When a company borrows money, either through a term loan or a bond, it usually incurs third-party financing fees (called debt issuance costs).
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