In April, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Interest: Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The revised standard simplifies the guidance under U.S. Generally Accepted Accounting Principles (GAAP) for how companies report the costs associated with issuing debt, such as loans and bonds. The amended guidance is part of FASB’s ongoing initiative to reduce complexity in the accounting standards.
A need for change
Under current GAAP, costs associated with issuing debt are reported as deferred assets on the balance sheet. In recent years, FASB has received feedback from companies, auditors and investors that allowing different balance sheet presentations for debt issuance costs, debt discounts and debt premiums creates unnecessary complexity.
The current guidance differs from the guidance in International Financial Reporting Standards (IFRS). IFRS requires companies to deduct the transaction costs from the carrying value of the financial liability, rather than to record the costs as a separate asset.
Additionally, the requirement to recognize debt issuance costs as deferred assets conflicts with the guidance in FASB Concepts Statement No. 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. Concepts Statement 6 further states that debt issuance costs can’t be an asset because they provide no future economic benefit.
One consistent approach
To simplify presentation of debt issuance costs, ASU 2015-03 requires companies to report debt issuance costs on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The updated standard aligns the presentation guidance for debt issuance costs with IFRS and with overriding FASB concepts. It doesn’t, however, change the recognition and measurement guidance for debt issuance costs in any other way.
Public companies must apply the amendments for reporting periods that start after December 15, 2015. Private companies also must apply the changes for fiscal years that begin after December 15, 2015, but they’ll get an extra year to apply the changes for quarterly financial reports and other reports for periods of less than a year.
FASB will permit early adoption of the updated standard. As companies adopt the amendments, they should revise balance sheets for periods prior to the effective date, which will make it easier for investors to evaluate a company’s financial performance. FASB also wants companies to explain the accounting change in the footnotes to their financial statements. Beyond the costs of making these relatively minor changes, companies are expected to incur no significant costs as they implement the revised guidance.