United States

Presentation of issuance costs related to term debt and lines of credit

INSIGHT ARTICLE  | 

Historically, entities have been required to present issuance costs related to term debt (e.g., legal and underwriting costs) as assets on the balance sheet and debt discounts (e.g., lenders’ fees) as a reduction of the related debt’s carrying amount. The requirement to present issuance costs related to term debt as assets was changed in April 2015 when the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The change brought about by this ASU requires presentation of issuance costs related to term debt as a reduction of the related debt’s carrying amount on the balance sheet. 

For public business entities, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods therein. For all other entities (e.g., private entities), the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods in fiscal years thereafter. All entities have the option to early adopt the ASU. Upon adoption, the new guidance must be applied retrospectively to all periods presented.

In implementing ASU 2015-03, a question arose regarding whether the guidance in ASU 2015-03 should be applied to issuance costs related to a line of credit. The views of the staff of the Securities and Exchange Commission (SEC staff) on this question, as well as the subsequent accounting for those costs, have been captured in ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. In ASU 2015-15, the SEC staff indicates that ASU 2015-03 does not address the presentation or subsequent measurement of issuance costs related to a line of credit. Accordingly, they would not object to the following accounting policy: 

  • Deferring issuance costs related to a line of credit and presenting them as an asset
  • Amortizing deferred issuance costs related to a line of credit ratably over the term of the line of credit

The SEC staff’s view does not depend on whether there are any outstanding borrowings on the line of credit. In other words, the SEC staff would not object to presenting issuance costs related to a line of credit as an asset even if there is an outstanding balance on the line of credit. While the SEC staff’s view only technically applies to public entities, we believe their view is equally appropriate for private entities. 

The SEC staff’s view represents one accounting policy that an entity could choose to elect for presenting issuance costs related to a line of credit. While we believe this is the accounting policy virtually all entities follow in practice, the only other acceptable accounting policy is to present the issuance costs related to a line of credit as a reduction of the related line of credit’s carrying amount or, in the absence of a balance on the line of credit, as a reduction of the entity’s total debt. Under this accounting policy, if the entity has no outstanding debt balance, the issuance costs related to the line of credit would be presented as an asset. As such, there would never be a negative total debt balance under this accounting policy. For example, if the only debt an entity has is a line of credit with no outstanding balance at the reporting date, under this accounting policy any unamortized issuance costs related to the line credit should be classified as an asset (and not as a negative liability). To the extent an entity wishes to elect this accounting policy, it would need to do so in accordance with the guidance on changes in accounting policy in Topic 250, Accounting Changes and Error Corrections, of the FASB’s Accounting Standards Codification. However, when the possibility exists of there being no debt at the reporting date to which any unamortized issuance costs could be offset (e.g., the only debt the entity has is a line of credit), we would encourage election of an accounting policy consistent with the SEC staff’s view in ASU 2015-15, which reflects those unamortized issuance costs as an asset at each reporting date. This will eliminate the possibility of reporting issuance costs related to a line of credit as a reduction of debt in some periods and an asset in other periods.     

Both public and private entities should keep in mind the need to disclose their accounting policy for issuance costs related to a line of credit.

Example 

Facts: Reporting Entity (RE) has a calendar year end. At December 31, 20X1, RE has term debt outstanding with Lender. The principal amount of the debt is $20 million, which is due in full on December 31, 20X6. RE pays interest annually on December 31 at 6 percent. At December 31, 20X1, the unamortized debt discount (representing Lender’s fees) is $400,000 and the unamortized issuance costs (representing legal fees) are $150,000. 

RE has a $10 million line of credit with Bank that expires on December 31, 20X5. At December 31, 20X1, there is an outstanding balance on the line of credit of $8 million and unamortized issuance costs (representing legal fees) of $50,000. For purposes of presenting issuance costs related to the line of credit, RE follows an accounting policy consistent with the SEC staff’s view captured in ASU 2015-15. 

Assume that both the debt and line of credit should be classified as long-term at December 31, 20X1 and they are RE’s only long-term liabilities.

Analysis: The following is an example of how RE would report the amounts related to its debt and line of credit in its balance sheet at December 31, 20X1, both before and after it adopts ASU 2015-03:

If RE’s accounting policy required presentation of the issuance costs related to its line of credit as a reduction of debt, the carrying amount of the line of credit on the balance sheet at December 31, 20X1 would have been $7,950,000. Under that policy, if there had been no outstanding balance on the line of credit at December 31, 20X1, the unamortized issuance costs related to the line of credit would have been reflected in the net carrying amount of the long-term debt (which would have been $19.4 million).

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