In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) Number 2015-3 entitled “Simplifying the Presentation of Debt Issuance Costs.” FASB issued this update as part of an ongoing effort, known as the Simplification Initiative, to simplify generally accepted accounting principles (GAAP). The update also brings GAAP more closely into alignment with guidance in International Financial Reporting Standards (IFRS).
The new guidance specifies that debt issuance costs under the new standard are to be netted against the carrying value of the financial liability. Under current guidance, debt issuance costs are recognized as a deferred charge and reported as a separate asset on the balance sheet. The new guidance aligns the treatment of debt issuance costs and debt discounts in that both reduce the carrying value of the liability. It is important to note that neither the recognition nor measurement of debt issuance costs is changed as a result of the ASU. Amortization of debt issuance costs is to be recorded as interest expense on the income statement.
The effective date of the new guidance is for fiscal years beginning after December 15, 2015, for public business entities and interim periods within those fiscal years. For all other entities (including not-for-profits), the effective date is for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been issued previously.
The guidance should be applied on a retrospective basis, meaning any prior period balance sheets before the effective date must be adjusted to ensure the presentation is consistent in all years. Upon adoption, the entity is required to include the disclosures related to a change in accounting principle. The disclosure requirements are:
- The nature of, and reason for, the change in accounting principle.
- The transition method.
- A description of the prior-period information that has been retrospectively adjusted.
- The effect of the change on the financial statement line item (that is, the debt issuance cost asset and the debt liability).
In summary, ASU 2015-03 aligns the treatment of debt issuance costs with debt premiums and debt discounts. All items will be netted against the debt liability on the balance sheet as of the effective date.
To discuss how PYA can assist your business with the treatment of debt, or if you have questions about this or other accounting standards updates, contact the experts listed below at PYA, (800) 270-9629.