A few months ago, we posted an article explaining the accounting treatment for debt issuance costs (click here to access that article). Since then, the FASB has issued Accounting Standards Update (ASU) 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This update does not change the method for recognizing and amortizing debt issuance costs, but rather simplifies their presentation. This new guidance requires that costs related to debt issuance now be presented as a direct deduction to the carrying amount of the liability. Prior to this amendment, the debt issuance costs were presented separately on the balance sheet as an “other asset”.
It is possible that a company could incur these types of costs in one period and not secure the debt until the next. In this circumstance, there would be an asset recorded on the balance sheet until the date that the debt is recorded, at which time the asset would be presented as a deduction to the liability.
For nonpublic entities, these amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is acceptable, but the guidance must be applied retrospectively (for all prior periods presented).
Disclosures applicable to a change in accounting principle are required, including 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, and the effect of the change on the financial statement line items.
A simple example disclosure is as follows:
Change in Accounting Principle:
Effective January 1, 2014, the Company elected to change its method of presentation relating to loan origination fees in accordance with FASB ASU 2015-03. Prior to 2014, the Company’s policy was to present these loan origination fees in Other Assets on the balance sheet, net of accumulated amortization. Beginning in 2014, the Company has presented these fees as a direct deduction to the related note payable.
This could also affect the accountant’s or auditor’s report in the year of adoption. In the case of audited financial statements, an emphasis of matter paragraph may be added to the auditor’s report depending on materiality. In the case of a reviewed or compiled financial statement, there is no requirement to add a paragraph to the report related to the change, but a paragraph may be added using practitioner discretion.