New Treatment of Debt Issuance Costs
Debt issuance costs are typically direct costs (like commissions and legal and accounting fees) incurred in the issuance of debt. Many banks have incurred these costs in the issuance of trust preferred securities as well as other debt instruments.
In one of its efforts to simplify accounting and financial statement presentations, the Financial Accounting Standards Board (FASB) issued a new accounting pronouncement, ASU No. 2015-03, Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The pronouncement changes the way that debt issuance costs are classified and presented on companies’ balance sheets.
Until now these costs have been capitalized under assets as deferred charges (similar to prepaid expenses); amortization of the costs is charged to operations over the time period that the related debt is outstanding. Members of FASB noted that this treatment is inconsistent with the treatment of debt discounts and premiums which is subtracted from or added to the face amount of the debt. Also, the classification of these costs as an asset is at odds with current thoughts about what constitutes an asset.
Under the new rules debt issuance costs are deducted from the outstanding balance of the obligation. Additionally, amortization of these costs is charged to interest expense. The effect of these changes is a higher imputed interest rate—which is one of the new items to be disclosed in the financial statements.
This pronouncement is effective for years beginning after December 15, 2015; however, early adaption is permitted for financial statements not yet issued. To enhance comparability, similar elements in financial statements that are presented for periods prior to the year of adoption should be reclassified.