Write off of unamortized debt issuance costs
Companies obtain such financing to fund working capital, acquire a business, etc.
The process of obtaining unamirtized loan or issuing debt securities involves costs. In this article, we will look at accounting requirements for debt issuance costs under US If and an example of accounting for such costs using the effective interest rate method and the straight-line method.
Nature and accounting for debt issue costs When a company obtains a loan e.
In many cases, the reg requires the issuer to allocate debt issuance costs as if the costs were original issue discount subject to Reg. ASU relates only to the presentation of debt issuance costs; it does not affect the recognition and measurement of such amounts. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. The exercise price of the Warrants was a nominal amount per share, and Taxpayer paid Holder a cash incentive fee. This controversy may be resolved at some point as part of the accounting standard modifications, but for now US GAAP requires capitalization and amortization of deferred financing costs. Debt issuance costs generally must be capitalized and amortized over the term of the loan. Write-Off of Unamortized Debt Issuance Costs: This excerpt taken from the CY Q filed Nov 7, In this article, we will look at accounting requirements for debt issuance costs under US GAAP and an example of accounting for such costs using the effective interest rate method and the straight-line method.
These costs include legal, accounting and underwriting fees, commissions, and so on. There are several interchangeable terms for such costs: Ubamortized will use the term deferred financing costs in this article even though other terms are acceptable as well.
There is a little controversy related to accounting for deferred financing costs. On the other hand, generally accepted accounting principles issued by the FASB indicate that deferred financing costs should be recorded on the balance sheet and amortized over the financing e. This controversy may be resolved at some point as part of the accounting standard modifications, but for now US GAAP requires capitalization and amortization of deferred financing costs.
This article only covers the basics of accounting for deferred financing costs. Thus, an entity should continue to present such costs as an asset and subsequently amortize them ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This excerpt taken from the CY Q filed May 11, This excerpt taken from the CY Q filed Ynamortized 7,
How should deferred financing costs be amortized? The FASB again indicates that the effective interest rate method should be used. However, the straight-line method can be applied as well if the differences resulting from its application when compared to the effective interest rate method are not material i.
The effective interest rate method, as we will see further, results in a constant rate of amortization charges in relation to the related debt balance. The straight-line method, however, results in a lower rate during the first part of a debt term and higher rate towards the end of the debt term. This article only covers the basics of accounting for deferred financing costs. More complex issues related to accounting for these costs are not discussed here.