FASB Simplifies Guidance on Reporting Debt Issuance Costs
In April, 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. The revised standard simplifies the guidance under U.S. Generally Accepted Accounting Principles (GAAP) for how companies report the costs associated with issuing debt, such as loans and bonds. The amended guidance is part of FASB’s ongoing initiative to reduce complexity in the accounting standards.
A need for change
Under current GAAP, costs associated with issuing debt are reported as deferred assets on the balance sheet. In recent years, FASB has received feedback from companies, auditors and investors that allowing different balance sheet presentations for debt issuance costs, debt discounts and debt premiums creates unnecessary complexity.
The current guidance differs from the guidance in International Financial Reporting Standards (IFRS). IFRS requires companies to deduct the transaction costs from the carrying value of the financial liability, rather than to record the costs as a separate asset.
Additionally, the requirement to recognize debt issuance costs as deferred assets conflicts with the guidance in FASB Concepts Statement No. 6, Elements of Financial Statements, which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. Concepts Statement 6 further states that debt issuance costs can’t be an asset because they provide no future economic benefit.
One consistent approach
To simplify presentation of debt issuance costs, ASU 2015-03 requires companies to report debt issuance costs on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The updated standard aligns the presentation guidance for debt issuance costs with IFRS and with overriding FASB concepts. It doesn’t, however, change the recognition and measurement guidance for debt issuance costs in any other way.
Public companies must apply the amendments for reporting periods that start after Dec. 15, 2015. Private companies also must apply the changes for fiscal years that begin after Dec. 15, 2015, but they’ll get an extra year to apply the changes for quarterly financial reports and other reports for periods of less than a year.
FASB will permit early adoption of the updated standard. As companies adopt the amendments, they should revise balance sheets for periods prior to the effective date, which will make it easier for investors to evaluate a company’s financial performance. FASB also wants companies to explain the accounting change in the footnotes to their financial statements. Beyond the costs of making these relatively minor changes, companies are expected to incur no significant costs as they implement the revised guidance.
Proposed reprieve for the new revenue recognition standard
Bowing to repeated stakeholder requests, FASB voted 4-3 to release a proposal to offer an extra year for public companies and two years for private companies to comply with the revenue recognition standard published in May 2014. The three dissenting board members favored a two-year deferral for all companies. On April 29, FASB released the proposal, and it wants comments submitted by May 29, 2015.
The effective date was originally set for 2017, but many companies have told FASB that they need more time to implement the new guidance because of the breadth of change and importance of revenue in a financial statement. Changes are expected to be especially significant for companies in the software, media and telecommunications industries, which are accustomed to the industry-specific revenue guidance in U.S. Generally Accepted Accounting Principles. If U.S. companies don’t want (or need) the extra time, they can still opt to voluntarily adopt the standard in 2017.
On April 28, the International Accounting Standards Board decided to issue a proposal to delay its revenue recognition standard by one year, to January 2018. The proposal is expected to be issued in mid-May for a comment period of at least 30 days. While FASB heard many requests from U.S. companies, only four companies asked the international board for an extension. Foreign companies are generally more familiar with the principles-based accounting employed by the new revenue standard.