written by Chelsey Dollarhide
On April 7, 2015, the Financial Accounting Standards Board (FASB) issued an accounting standards update with the intent of simplifying the presentation of debt issuance costs. The new standard on the presentation of debt issuance costs states that debt issuance costs should be recorded as a direct deduction from the carrying amount of the debt liability. This new treatment is consistent with the current treatment of debt discounts.
The update was deemed necessary because under past reporting standards, different balance sheet presentation requirements existed for debt issuance costs and debt discounts and premiums. The past standard of treating debt issuance costs as deferred charges also created a divergence from the International Financial Reporting Standard’s (IFRS) required treatment of debt issuance costs as a deduction from the carrying value of the financial liability and not as a separate asset.
The FASB also stated in the standards update that previous treatment of debt issuance costs conflicted with the guidance provided by FASB Concepts Statement No. 6, Elements of Financial Statements. According to Concepts Statement No. 6, debt issuance costs and debt discounts are similar and should be treated as a reduction of the proceeds from borrowing. This treatment will reduce the effective interest rate for the debt issued.
The new standard takes effect for fiscal years beginning after December 15, 2015 and for interim periods within fiscal years beginning after December 15, 2016 for private companies and not-for-profit organizations. Public companies are required to follow the new standard for fiscal years beginning after December 15, 2015 and interim periods within those years. Early adoption of the standard is permitted by FASB.
If you have any questions regarding the new accounting standards update, please don’t hesitate to call The Whitlock Company at 417-881-0145. Read more info here from the Journal of Accountancy.