By Callie White
In April, 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03: Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The FASB issued this update as a part of its Simplification Initiative to eliminate what the Board determined to be unnecessary complexity for balance sheet presentation which will, in turn, improve the usefulness of the information being provided to users of the financial statements.
The FASB also recognized that its prior guidance requiring that debt issuance costs be reported as deferred charges (an asset), and amortized, was inconsistent with the guidance in FASB Concepts Statement No. 6, Elements of Financial Statements. The Statement provides that “debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate,” and that, “debt issuance costs cannot be an asset because they provide no future economic benefit.” ASU 2015-03 rectifies this inconsistency. Among its amendments is one which provides that, , debt issuance costs should now be presented on the balance sheet netted against the carrying value of the debt liability instead of an asset.
During the exposure process of ASU 2015-03, the Private Company Council (PCC) stated that it did not agree with some of the new guidance provided in this Update. The PCC argued that the face amount of the borrowings, which excludes the debt issuance costs, is the most pertinent information for private company users of financial statements, and that balance sheet presentation that recognizes the debt liability to include the debt issuance costs could be misleading to the users of the financial statements. The PCC asked the FASB to consider two alternative revisions to ASU No. 2015-03: 1) apply current generally accepted accounting principles (GAAP), or 2) require that debt issuance costs be expensed.
The FASB considered the PCC suggestions, but rejected them. It stated that having different standards for private and public entities was contrary to the simplification objective of the project. It further maintained that certain current GAAP are not consistent with the “debt discount, premium and issue cost” provisions of Concepts Statement No. 6; also, because other GAAP require that the face value of borrowings be disclosed in the financial statements, or in the notes to the financial statements, where users are able to obtain such pertinent information related to the borrowings. Finally FASB stated that: “Neither of the alternatives presented by the Private Company Council would always result in presentation of the debt liability at the face amount because any debt discount or premium would continue to be netted against borrowings.”
These amendments become effective for non- public entities for fiscal years beginning after December 15, 2015 and interim periods within fiscal years beginnings after December 15, 2016. The FASB decided that early adoption is permitted, but only for financial statements that have not been previously issued. This new guidance should be applied on a retrospective basis, wherein the balance sheet for each individual period presented should be adjusted to reflect the effects of applying this new guidance. If you have any questions regarding this update, please feel free to contact us.
Volume 2, Issue 4