What are Debt Issuance Fees?
Debt issuance fees refer to expenses that the government or public companies incur in selling bonds. The expenses include registration fees, legal fees, printing costs, underwriting costs, etc. The costs are paid to law firms, auditors, financial markets regulators, and investment banks that are involved in the underwriting process. They do not provide any benefits to the issuer, and accounting rules require the costs to be amortized over the term of the bonds.
What is Debt Issuance?
Debt issuance is an approach used by both the government and public companies to raise funds by selling bonds to external investors. In return, the investors earn periodic interest on the amount invested.
For example, the government can sell treasury bonds to the public as a way of raising money to finance development projects such as building roads and hospitals, as well as paying salaries to government employees. In return, investors earn periodic interest payments over the term of the bond, plus the face value of the bond upon maturity.
Accounting for Debt Issuance Fees
Whether a bond issuer decides to use private placement or underwriter placement, the company will incur certain costs such as legal costs, printing costs, and registration fees. The US Generally Accepted Accounting Principles provides guidelines on how companies should account for such costs.
To account for the expenses associated with bond issuance, debit the debt issuance costs account and credit the accounts payable account to account for the associated liability. Since the debt issuance account is an asset account, the issuance costs will first be recorded in the balance sheet of the bond issuer.
The asset will be charged to expense gradually. This is done by debiting the debt issuance expense and crediting the debt issuance account to shift the cost from the balance sheet to the income statement.
Amortization of Debt Issuance Fees
The debt issuance costs should be amortized over the period of the bond using the straight-line method. That makes the annual expense equal over the term of the bond. To record the amortization expense, debit the debt issuance expense account and credit the credit issuance cost account.
For example, assume that Company ABC incurred $50,000 in debt issuance fees and other charges, and the bond comes with a term of 10 years. The company would amortize the fees over the term of the bond. It can be calculated as follows:
$50,000/10 = $5,000
The expense is amortized at the rate of $5,000 per year for the term of the bond, which is 10 years. The journal entry for the transaction is as follows:
|Debt issue expense||$5,000|
|Debt issue costs||$5,000|
CFI offers the Financial Modeling & Valuation Analyst (FMVA)® certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: