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 the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing is ...
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 clients (individuals or corporations) about their legal rights and responsibilities, and to ...
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 busine ...
as a contra long-term liability, and
amortized using the
effective interest method
Effectiveness is the capability of producing a desired result or the ability to produce desired output. When something is deemed effective, it means it has an intended or expected outcome, or produces a deep, vivid impression.
Etymology
The ori ...
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
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Deferred Tax
Deferred tax is a notional asset or liability to reflect corporate income taxation on a basis that is the same or more similar to recognition of profits than the taxation treatment. Deferred tax liabilities can arise as a result of corporate ta ...
*
Deferred Acquisition Costs
References
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United States Generally Accepted Accounting Principles
Commercial bonds
Costs