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Companies obtain finance from various sources. Each source comes with its costs. For debt, companies must incur expenses, such as underwriting, legal and professional, and credit rating agency fees. These expenses fall under debt issuance costs.
What are Debt Issuance Costs?
Debt issuance costs, also known as debt issuance fees or bond issuance costs, are the expenses incurred by a company when it raises funds through publishing debt securities, such as bonds or notes. These costs represent the fees associated with issuing debt instruments to investors. Debt issuance costs are considered a type of deferred financing cost and are treated as an asset or contra liability on the company’s balance sheet.
Debt issuance costs constitute a cost related to obtaining funds or, in this case, debt finance. Usually, most of these costs occur at the initial stages of the process. However, companies may also incur them during or after the debt gets issued. These costs can also contribute to more expenses in the future that constitute a part of these costs.
What do Debt Issuance Costs include?
Debt issuance costs can include various expenses related to obtaining or issuing debts. Some of the primary examples of debt issuance costs include the following.
Underwriting fees
Fees paid to underwriters who help structure and sell the debt securities to investors.
Legal and professional fees
Legal and consulting fees related to the drafting of legal documents, regulatory compliance, and due diligence.
Printing and administrative costs
Costs associated with preparing and printing offering documents, prospectuses, and other necessary materials.
Credit rating agency fees
Charges for obtaining credit ratings from rating agencies to assess the creditworthiness of the issued debt.
Registration and filing fees
Fees paid to regulatory authorities for registering the debt securities and complying with relevant regulations.
Commission and brokerage fees
Fees paid to brokers and agents involved in the sale of the debt securities.
What is the accounting for Debt Issuance Costs?
The accounting for debt issuance costs requires companies to recognize them as a contra liability on the balance sheet. Previously, the treatment involved recording these costs as an asset and amortizing them over the total period for the loan. However, recent changes entail removing these costs from the total liability on the balance sheet. This treatment makes them a contra-liability account.
With the contra liability treatment, companies must still use debt issuance costs over the loan period. Any amortization realized under this process gets charged to the income statement as an interest expense. This treatment applies to all debt issuance costs with a few exceptions. Once the loan period ends, companies charge any remaining balance on the contra liability account to the income statement.
What is the journal entry for Debt Issuance Costs?
When a company issues debt, it uses the following journal entries to record the transaction.
| Dr | Cash or bank |
| Cr | Debt (liability account) |
For any debt issuance cost incurred during the process, companies use the following journal entry.
| Dr | Debt issuance costs (contra liability) |
| Cr | Cash or bank or payable |
Over time, companies amortize these costs. The journal entry for that is as follows.
| Dr | Interest expense |
| Cr | Debt issuance costs (contra liability) |
Conclusion
Debt issuance cost refers to any expenses incurred to issue debt. Usually, it occurs when companies obtain finance through issuable instruments, for example, bonds. Previously, accounting standards required companies to treat these costs as assets. However, recent changes entail recognizing them as a contra liability. Companies must amortize debt issuance costs over the loan period.
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