Celina Carter, DiCicco, Gulman and Co. LLP

In April 2015, the Financial Accounting Standards Board issued Accounting Standard Update 2015-03, entitled Simplifying the Presentation of Debt Issuance Costs. In doing so, the FASB requires certain costs related to debt issuance to be presented as a direct reduction of the value of the related liability, which is consistent with accounting treatment for debt discounts. This article explores the background which led to the adoption of ASU 2015-03 and provides guidance for real estate and accounting professionals affected by the update.

Prior Treatment of Debt Issuance Costs

In order to understand the impact of ASU 2015-03 going forward, it is helpful to review relevant definitions and revisit past presentation of debt issuance costs.

Patrick O'Beirne, DiCicco, Gulman and Co. LLP

What are debt issuance costs? Anytime an individual or entity acquires new debt, there are typically costs involved. Debt issuance costs are third party costs that are directly attributable to issuing a debt instrument, other than fees paid to a lender.

How have debt issuance costs been treated historically? Preparers of financial statements were required to present non-lender third party costs as an asset prior to the issuance of ASU 2015-03. Debt issuance costs were considered a deferred charge instead of a debt discount, which acts as a direct adjustment to the carrying value of the debt. These costs were capitalized and amortized over the life of the loan as amortization expense.

ASU 2015-03 Basics

In the view of the FASB, presentation of debt issuance costs as a deferred charge resulted in the exact type of complexity the Simplification Initiative was intended to avoid. As such, ASU 2015-03 was issued to require that all costs related to issuing a debt instrument must be listed on a balance sheet as a direct reduction of the carrying value of the debt. These costs will continue to be amortized over the life of the loan, but will be reported as additional interest expense.

Simplifying the means of presenting debt issuance costs in this manner results in alignment between US GAAP and international standards. It also resolves an internal conflict with FASB guidance on the elements of financial statements, which points out that debt issuance costs do not qualify as “assets” because there is no future economic benefit.

Effective Dates

• ASU 2015-03 is effective for financial statements issued for fiscal years starting after December 15, 2015.

• Early Adopters: Early adoption is permitted for financial statements that have not been previously issued, so firms are free to implement ASU 2015-03 standards immediately.

Guidance on Debt Issuance Cost Presentation

Though the effective date requirements of ASU 2015-03 do not impact businesses for 2015, we can benefit from some guidance on the presentation of debt issuance costs on balance sheets.

GAAP: Treating debt issuance costs as a direct reduction of the related debt, as opposed to an asset, on financial statements is consistent with the presentation of debt discounts under US GAAP. Therefore, ASU 2015-03 is in alignment with existing standards. The new guidance should be applied on a retrospective basis. Required disclosures include the nature and reason for change in accounting principle, the transition method, and the effect of the changes on the financial statement line items.

SEC Announcement: After reviewing the provisions and intent of ASU 2015-03, the SEC announced that it would not object to an entity presenting debt issuance costs as an asset within the terms of a revolving debt arrangement. The language of ASU 2015-03 did not specifically speak to revolving debt issuance costs, so the SEC would presumably see revolver arrangements as falling outside the standards on debt issuance costs. It would also allow an entity to amortize costs over the term of the revolving loan.

Whether ASU 2015-03 has the intended effect of simplifying the means of presenting debt issuance costs has yet to be seen. But there can be no doubt that it will have an impact on preparation and presentation of financial statements going forward.

Celina Carter, CPA and Patrick O’Beirne, CPA specialize in real estate at DiCicco, Gulman & Co., Boston.