Debt issuance costs have a new parking place. For some time now, such costs were booked as a deferred charge (an asset). Now, these cost will be netted with the related debt.
This change is required by Accounting Standards Update No. 2015-03, Interest – Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30).
If you have not already done so, you need to adopt this standard for years ending December 31, 2016. This is a change in accounting principle.
ASU 2015-03 (ASC 835-30) states the following (bold emphasis mine):
To simplify the 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.
(This article addresses accounting for nongovernmental entities. Debt issuance costs for governments are expensed as incurred.)
For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.
For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016.
Early adoption of the amendments in this Update is permitted for financial statements that have not been previously issued.
An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include 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, and the effect of the change on the financial statement line items (that is, issuance cost as an asset and the debt liability).
Click here for the full standard.
ASC 835-30-65 says the following:
An entity shall disclose in the first fiscal year after the entity’s adoption date, and in the interim periods within the first fiscal year, the following:
The main point of these disclosures is to communicate how issuance cost was previously presented and how it is presented in the current year. So state where prior year issuance cost was presented (in assets)–and how much. Then state where the prior year issuance cost is presented in this years’ financial statement (as a part of debt).
Here’s an example:
In 20X6, the Company retroactively adopted the requirements in FASB ASC 835-30 to present issuance costs as a reduction of the carrying amount of the debt. In the prior year, the issuance costs were presented as an asset. Long-term debt as of December 31, 20X5, was previously reported on the balance sheet as $2,245,000 with the associated $100,200 unamortized debt issuance costs included in other assets. Amortization of the debt issuance costs is reported as interest expense in the income statement.
I am including the following lines in my debt disclosure:
So, my debt disclosure starts with total debt. Then I subtract the issuance costs to obtain my net debt figure. From this number, I subtract the short-term portion of the debt to arrive at the net long-term debt amount. The long-term debt number should agree with the long-term debt on the balance sheet.
Since this is a change in accounting principle, add an emphasis of a matter paragraph just after the opinion paragraph. For example:
Adoption of Accounting Standards Update No. 2015-03, “Interest-Imputation of Interest—Simplifying the Presentation of Debt Issuance Costs”
As discussed in Note 1 to the financial statements, The Widget Company changed its method for presenting debt issuance costs in the balance sheet. This change is in accordance with Accounting Standards Update No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs. Our opinion is not modified with respect to this matter.
Check out my article Auditing Debt: The Why and How Guide.
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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