The book proposes an example where your company issues a 1,000,000 bond for $980,000. Assuming no sales/transaction costs, that means your cash should increase by 980k and your liability should increase by 980k.
The book says that if issuance costs are 5,000 then
Assets are 980k (975 new cash + 5k deferred charge)
Liability are 980k
-5000 will show up in the cash flow statement (this part makes sense)
How does that make sense? Shouldn’t your assets be 5000 dollars lower than your liabilities because you’ll never recover those fees? It’s like when you refinance the mortgage on your house: you’ll never see those points again, so it 'll discourage you from trying to re-fi frequently.
In IFRS both the asset and liability would have gone up by 975K. They would expense the 5K immediately.
This has implications if the company wishes to repay the bond prior to it’s maturity. In USGAAP the you need to subtract the gains (by repayment) by the amount yet to be amortised and in case of losses the losses would be added up by the amount yet to be amortised, thus inflating the loss.
Could you please elaborate further your explanation about recognizing de issuance cost under IFRS? I understand that we have to subtract the costs to the cash obtained and record the difference as an expense on the IS. However, I don’t see how we can record a liability for an amount different than that we owe. In my opinion, the liability should be recorded equal to de face value of the issue (assuming no discount or premium)