Blogging Beyond the Numbers

New Accounting for Debt Issuance Costs
Posted by: Brian Dahlk 11 months ago

When co-ops acquire new long-term debt, they often incur costs in conjunction with the process. These costs are commonly known as debt issuance costs. Such costs of obtaining financing – such as bank fees, accounting fees to prepare prospective presentations, and legal fees to draft the necessary documents – should not be expensed. In the past these costs have usually been capitalized as an asset account called loan fees and then amortized over the term of the loan through an income statement account called amortization expense.

However, a change in the accounting principles related to debt issuance costs has recently taken effect.

For all businesses whose years begin after 12/15/15 (essentially, staring with the financial statements of 2016 calendar year ends), debt issuance costs are to be presented as a contra-liability account rather than as an asset.

Additionally, amortization of these costs should now be recorded as interest expense. Therefore, going forward the phrase “amortization expense” is only to be used for amortization of intangible assets such as goodwill, licenses, and trademarks. The debt issuance costs should be amortized over the length of the underlying loan. The calculation of the costs expensed to interest should follow the “effective rate of interest” method. In practice, amortization of loan costs using the straight-line method is acceptable if the results are not materially different from the “effective rate” method.

This accounting change must also be presented retroactively for prior periods in comparative financial statements. A paragraph such as the following should accompany the footnote that discloses long-term debt arrangements:

In 2016, the Cooperative retroactively adopted the requirements in FASB ASC 835-30 to present debt issuance costs as a reduction of the carrying amount of the debt rather than as an asset. Long-term debt as of December 31, 2015 was previously reported on the balance sheet as $3,117,000 with the associated $221,000 unamortized debt issuance costs included in other assets. Amortization of the debt issuance costs is reported as interest expense in the income statement.


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