Chapter 5 — Accounting for Debt Issuance Costs and Fees

5.2 Qualifying Debt Issuance Costs

ASC 470-20

45-1A Transaction costs incurred with third parties other than the investor(s) and that directly relate to the issuance of convertible debt instruments within the scope of this Subtopic shall be reported in accordance with the guidance in Section 835-30-45.

SEC Staff Accounting Bulletins

SAB Topic 5.A, Expenses of Offering [Reproduced in ASC 340-10-S99-1]

Facts: Prior to the effective date of an offering of equity securities, Company Y incurs certain expenses related to the offering.

Question: Should such costs be deferred?

Interpretive Response: Specific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. However, management salaries or other general and administrative expenses may not be allocated as costs of the offering and deferred costs of an aborted offering may not be deferred and charged against proceeds of a subsequent offering. A short postponement (up to 90 days) does not represent an aborted offering.

Nonauthoritative AICPA Guidance

Technical Q&As Section 4110, “Issuance of Capital Stock”

.01 Expenses Incurred in Public Sale of Capital Stock

Inquiry — A closely held corporation is issuing stock for the first time to the public.

How would costs, such as legal and accounting fees, incurred as a result of this issue, be handled in the accounting records?

Reply — Direct costs of obtaining capital by issuing stock should be deducted from the related proceeds, and the net amount recorded as contributed stockholders’ equity. Assuming no legal prohibitions, issue costs should be deducted from capital stock or capital in excess of par or stated value.

Such costs should be limited to the direct cost of issuing the security. Thus, there should be no allocation of officers’ salaries, and care should be taken that legal and accounting fees do not include any fees that would have been incurred in the absence of such issuance.

Debt issuance costs are specific incremental costs and fees that are (1) paid to third parties and (2) directly attributable to the issuance of a debt instrument. They exclude costs and fees paid to the creditor, which represent a reduction of the debt proceeds (see Section 5.3.3.2). Costs and fees that would have been incurred irrespective of whether there is a proposed or actual offering do not qualify as debt issuance costs. Thus, debt issuance costs represent costs and fees incurred with third parties that result directly from and are essential to the financing transaction and would not have been incurred by the issuer had the financing transaction not occurred.

SAB Topic 5.A (reproduced in ASC 340-10-S99-1) addresses the accounting for expenses related to an offering of equity securities and is applicable by analogy to debt issuance costs. Under this guidance, allocated management salaries and other general and administrative expenses do not represent issuance costs. Further, if a proposed offering is aborted (including the postponement of an offering for more than 90 days), the associated costs do not represent issuance costs of a subsequent offering.

AICPA Technical Q&As Section 4110.01 addresses the accounting for expenses incurred in a public sale of capital stock and is applicable by analogy to debt issuance costs. Under this guidance, issuance costs are limited to the direct costs of issuing the security. Legal and accounting fees that would have been incurred irrespective of whether the instrument was issued do not represent issuance costs of that instrument.

The table below lists examples of costs and fees that may or may not qualify as debt issuance costs.

Qualifying Costs if Directly Attributable to Debt Issuance1	Nonqualifying Costs
Document preparation costs Costs and fees paid to attorneys, accountants, financial advisers, or other professional advisers involved in the debt issuance Registration costs and fees Listing costs and fees Legal costs and fees Underwriting costs and fees Printing costs Original issue taxes Travel costs Roadshow costs Costs of third-party credit enhancements obtained for the benefit of the creditor (e.g., financial guarantees or credit insurance)	Allocated management salaries Allocated general and administrative expenses Costs and fees paid to attorneys, accountants, financial advisers, or other professional advisers if they would have been incurred irrespective of whether the instrument was issued Office rent Insurance premiums for directors’ and officers’ insurance policies Employee bonuses Employee stock option costs Costs of an aborted offering

Qualifying Costs if Directly Attributable to Debt Issuance1

Nonqualifying Costs

Document preparation costs
Costs and fees paid to attorneys, accountants, financial advisers, or other professional advisers involved in the debt issuance
Registration costs and fees
Listing costs and fees
Legal costs and fees
Underwriting costs and fees
Printing costs
Original issue taxes
Travel costs
Roadshow costs
Costs of third-party credit enhancements obtained for the benefit of the creditor (e.g., financial guarantees or credit insurance)

Allocated management salaries
Allocated general and administrative expenses
Costs and fees paid to attorneys, accountants, financial advisers, or other professional advisers if they would have been incurred irrespective of whether the instrument was issued
Office rent
Insurance premiums for directors’ and officers’ insurance policies
Employee bonuses
Employee stock option costs
Costs of an aborted offering

Connecting the Dots

At the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments, Mr. Carlton Tartar spoke about a fact pattern addressed by the SEC staff in which a registrant proposed treating costs related to the initial preparation and auditing of its financial statements as deferred offering costs because the financial statements were prepared for the sole purpose of pursuing an IPO. The staff ultimately objected to the registrant’s proposed accounting because although the registrant needed to obtain audited financial statements to pursue an IPO, audited financial statements may be obtained for various other reasons. As a result, the staff did not view these costs as being directly attributable to the planned offering.

In accordance with these views, costs incurred with accountants to obtain audited financial statements would not be viewed as incremental costs that are directly attributable to the issuance of a debt instrument, unlike other costs incurred with accountants, which may be considered directly attributable to such an issuance.

Footnotes

Note that such costs may qualify as debt issuance costs only if they are incurred before the debt is issued. If costs incurred after an issuance of debt were not obligations as of the issue date, they cannot qualify as debt issuance costs.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.