I’m building out a model for a company and trying to figure out how the debt issuance costs are amortized.
I’m not an accountant, but I believe issuance costs are amortized equally over the life of the debt. For the company I’m looking at, the debt is puttable to the company, so I’m not sure how it works. Do you assume straight line amortization until the debt gets put to the company, and then just restate the amort accordingly?
Example: 10 year debt, puttable at any time, cost of issuance is $50
Normally: $5 gets amortized each year for 10 years
Curveball: debt gets put to the company at year 4.
If this debt in entirety will remain outstanding over the term (at company determined structure/discretion) I think you can reasonably amortize it straight line over that term. If on the other hand if there are scheduled repayments over term than probably a declining balance proration of the issuance costs is more appropriate.
However the obvious kicker is that if rates jump and the bond value declines to the point of triggering investor put of the bonds than I dont think that deferred issuance cost is justified any longer and I would assume write off of the deferred charge at this point.
So you may have to factor in some of these contingencies into your model as best you can
Note: A former practicing accountant in a past life just offering my thoughts but would not take this position to the SEC LOL. Depending on the purpose of your model I dont know if you have to get all precise as these costs over the life are often not all that material
I don’t know all the details on this exactly, as I’d have to look at some “official” sources.
But if I were to take a guess, I’d guess that you straight-line the amortization over the term of the loan. When the debt gets put back to company, then you expense the remaining portion ratably.
This seems to make the most sense, but whether that’s what the FASB says to do is anybody’s guess.
EDIT- I believe somebody else stated this already, but I don’t know that this would be something that is imperative to building a model for DCF purposes. This seems like small taters compared to the big picture. I don’t even think this would show up as a line item on the financial statements. Probably wouldn’t even show up in the notes, unless you had a microscope.
I’m a municpal bond accountant so I’ll chime in (1st post.) I don’t know if you already got your answer or gave up but here goes:
First, double-check your assumption that the costs of issuance (COI) will be amortized for tax purposes. Last year GASB changed the rules and we now expense these costs at closing. I don’t know what the accounting treatment is under FASB, so double-check. This is how we (and many other bond issuers) used to amortize COI.
Lets assume you issue a 2 dollar bond that will be outstanding for 4 years. Make a table as follows (note that time is the amount of time that a principal amount is outstanding, not the year number):
PRIN time (P*T) factor=PT/SUM
2 1 2 .25
2 1 2 .25
2 1 2 .25
2 1 2 .25
8
At the end of year one you expense 25% of the closing costs, easy.
At the end of year 2, 1 dollar is put/called/whatever so we must create a new table:
PRIN time (P*T) factor=PT/SUM
2 1 2 .33
2 1 2 .33
1 1 1 .17
1 1 1 .17
6
At the end of year two you will expense 41% of your closing costs-- your new factor of 33% for year two PLUS the difference between your new year 1 factor and the old one. .33+(.33-.25)=.41. You will have expensed .25+.41 = .66 and you’ll be on schedule to fully amortize by the end of year 4.
If the bond is still callable/putable, start over completely. Create a new table begining at time 3 where you will amortize only the 33% of remainging closing costs over the remaining life of the bond. If there’s any more puts/calls in the future you don’t have to go back and caluclate new factors for years 1,2 and expense the differences between the new and old factors all over agian, only for year 3 and onward,
Using this format you can accurately expense coi for all sorts of crazy amortization schedules with puts and calls. I hope this helps, let me know if you have any questions.
Issuance costs affect the effective rate, so they are not explicitly amortised but rather implicitly through debt carried at amortised cost using the ffective intereset rate method, unless debt is carried at fair value (rare) in which case such costs are expensed.
At put any difference between proceeds and the carrying amount goes to P/L. Like a sale of an asset (in our case settlement of a liability): proceeds - carrying amount = gain/loss in P/L
And don’t forget, this a debt instr with an embedded option which may have to be separated (don’t remember clear guidelines), as such the issuance costs will have to be pro-rated between the two components.