Debt Issuance Costs – Accounting Presentation Rules Demystified

“Debt issuance costs” are costs incurred that would not have been incurred had not an entity procured a new debt instrument – in other words, incremental costs directly related to the new financing. The FASB Accounting Standards Codification (ASC), interestingly, does not define “debt issuance costs”, although the FASB issued two Accounting Standards Updates (ASUs) in 2015 related to presentation of debt issuance costs, with effective dates for nonpublic companies for financial statements covering fiscal years ended in December 2016 or later.

The first ASU 2015-03 requires netting debt issuance costs against the related borrowing (like how a discount would be handled), rather than presenting these issuance costs as an asset.

ASU 2015-03 was followed up by ASU 2015-15 to publish SEC Staff guidance on accounting for debt issuance costs related to a line of credit (revolving credit) borrowing facility, since that fact pattern was not specifically covered in ASU 2015-03. The SEC Staff believes that debt issuance costs related to revolving credit facilities should be recorded as an asset, even if borrowings are outstanding under the arrangement at the reporting date. The rationale for this apparent inconsistency (asset versus contra-liability) is that a revolving credit facility is a “stand-ready” commitment to provide borrowings over a period of time, which is an asset to the reporting entity. On the other hand, once term loans or specified maturity loans are granted, and proceeds are received, no asset remains to be recognized.

So what does all this mean for presentation of debt issuance costs in the financial statements?

Issuance costs incurred to establish financing with specified maturities, such as term loans, should be presented net of the related borrowing on the balance sheet. If these costs were previously presented as assets, disclosures required when adopting a change in accounting principle should be made in the period the change is first made.

Issuance costs incurred to obtain a line of credit or revolving credit facility should be presented as an asset on the balance sheet, regardless of whether or not borrowings are outstanding at the reporting date.