Posted by Christina Bell, CPA
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Interest: Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs as part of their initiative to reduce complexity in the accounting standards. Previous to ASU 2015-03, debt issuance costs were presented as an asset on the balance sheet (statement of financial position) and amortized on a straight line basis over the life of the debt and the related amortization expense was recorded as such on the income statement (statement of activities).The revised standard makes two significant changes to U.S. Generally Accepted Accounting Principles (GAAP). Those changes are (1) presenting debt issuance costs as a deduction from the related debt rather than presenting it an asset and (2) reporting amortization of these costs as interest expense rather than as amortization expense. These changes do not affect the recognition and measurement of debt issuance costs. They only rearrange where debt issuance costs appear on the balance sheet and where amortization of these costs appear on the income statement.
In certain circumstances debt issuance costs may be incurred before the related debt. For example, an organization may incur costs for a line of credit in which it has not yet drawn upon. In this circumstance FASB concludes it is acceptable to record the debt issuance costs as an asset until the related debt liability is incurred and recorded.
This ASU is effective for all entities beginning with annual periods ending after December 15, 2016 (the December 31, 2016 financial statements for calendar year-end organizations). An organization is required to apply the changes retrospectively for all prior periods and disclose the accounting change in the footnotes to their financial statements during the first year of adoption.
For more information refer to the ASU on the FASB’s website.