November 27, 2021

Debt Issuance Cost Presentation Sure Doesn’t Seem Any Simpler

I like this Tom Selling post about the FASB's simplification of presenting debt issuances costs. I like it mainly because he picks apart the FASB's idea of what constitutes "simplification" as well as the Board's rationale for their decisions to the point where you have a hard time believing that the FASB actually issued this update

I realize this all sounds very boring and, to be fair, it is, but it's indicative of how counterproductive accounting standard setting has become. Or as Selling puts it, "an exemplar of the verbal gymnastics the FASB is wont to fob off as its 'basis for conclusions.' " 

The new rules say: 1) That debt issuance costs are not to be reported as an asset but rather a deduction to the carrying amount of the debt; 2) The amortization of the debt issuance costs would be classified to interest expense. 

To point 1 above — it is a little confusing as to why costs incurred to issue debt should reduce the carrying value. It's hard to argue that debt issuance costs are assets and therefore should be classified as such, I grant you, but it's equally as silly to think that because you paid some investment bank a hefty fee you should deduct that amount from the debt's carrying value. Right?

As for point point 2, it's not really simpler to call the amortization of those costs "interest expense," is it? This shouldn't be that complicated as Selling writes, "debt issuance costs are paid to investment bankers, and interest is paid to creditors." Huh. Now that's simple. Unless the concept of interest has drastically changed recently. 

Maybe I'm over-simplifying this, but that's supposed to be the point, isn't it? 

Anyway, the FASB's rationale for its conclusions are thus: 1) Debt issuance costs aren't assets; 2) IFRS deducts debt issuance costs from carrying value; 3) Debt issuance costs are like debt discounts and so they should be treated the same; 4) Treating debt issuance costs as a "valuation account" is consistent with the treatment of equity issuance costs.

Retorts to above boil down like this:

1. Debatable
2. WGAF
3. Costs and discounts are decidedly dissimilar.
4. Selling notes that FASB wants it both ways here: "Out of one side of its mouth the FASB summarily rejects a provision in APB 21 promulgated by its forefathers in due process — without trying to explain the reason why it was written into U.S. GAAP in the first place.  Out of the other side, it 'cites' for its ultimate 'purpose' a questionable analogy to a contrary ancient staff position — again without explaining the line of reasoning for historically different treatments of debt and equity issuance costs." 

Man, accounting is screwed up. Can anyone straighten this out? Best explanation gets "King Accountant" t-shirt. 

ASU 2015-03: The Latest Simplification to GAAP That’s Not [Accounting Onion]

Other accounting debates:
Just What the Hell is Goodwill Anyway? 

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