Over the last couple of years, there has been a lot of discussion surrounding the new lease accounting and revenue recognition guidance that has been issued and how it will affect contractor financial statements. With all this talk, it is easy to overlook some of the other accounting pronouncements that have recently been issued. One such pronouncement that is effective for this calendar year end (December 31, 2016) and could impact a lot of contractors is Accounting Standards Update (ASU) 2015-03 – Interest – Imputation of Inter (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs.
This ASU was issued in April 2015 and is effective for financial statements issued for fiscal years beginning after December 15, 2015. The Financial Accounting Standards Board (FASB) issued this ASU as part of its initiative to reduce complexity in accounting standards. The FASB received feedback that having different balance sheet presentation requirements for debt issuance costs and debt discounts and premiums creates unnecessary complexity. Recognizing debt issuance costs as a deferred charge (an asset) also is different from the guidance in International Financial Reporting Standards and also conflicts with the guidance in FASB Concepts Statement No. 6 Elements of Financial Statements, which state 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 cannot be an asset because they provide no future economic benefit.
The provision of this ASU requires that debt issuances costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In addition, amortization of the debt issuances costs will be reported as interest expense in the income statement.
As contractors work on their year-end financial statements, don’t forget about this ASU because it needs to be implemented this year.