Deferred financing costs or debt issuance costs is an accounting concept meaning costs associated with issuing debt (loans and bonds), such as various fees and commissions paid to
investment bank
Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
s,
law firm
A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service rendered by a law firm is to advise consumer, clients (individuals or corporations) about their legal rights and Obligation, respon ...
s,
auditor
An auditor is a person or a firm appointed by a company to execute an audit.Practical Auditing, Kul Narsingh Shrestha, 2012, Nabin Prakashan, Nepal To act as an auditor, a person should be certified by the regulatory authority of accounting an ...
s, regulators, and so on. Since these payments do not generate future benefits, they are treated as a contra debt account. The costs are capitalized, reflected in the
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
as a contra long-term liability, and
amortized using the
effective interest method or over the finite life of the underlying debt instrument, if below de minimus. The unamortized amounts are included in the long-term debt, as a reduction of the total debt (hence contra debt) in the accompanying consolidated balance sheets. Early debt repayment results in expensing these costs.
GAAP
Under U.S. GAAP, when issuing securities without specific
maturity, such as perpetual
preferred stock
Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt ins ...
, financing costs reduce the amount of paid in capital associated with that security.
[Paragraph 340-10-S99-1 of the FASB Codification, SAB Topic 5.A.]
Tax treatment
For U.S. federal income tax purposes, DFC are generally amortized over the life of the debt using the straight-line method.
See also
*
Deferred Tax
*
Deferred Acquisition Costs
References
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United States Generally Accepted Accounting Principles
Commercial bonds
Costs