5.4 Costs and Fees Associated With Revolving Debt

ASC 835-30-45-1A does not apply to costs incurred in connection with line-of-credit or revolving-debt arrangements (whether drawn or undrawn). The terms of such arrangements permit the amount of debt outstanding to fluctuate by giving the borrower an option to borrow, repay, and reborrow amounts up to a specified maximum amount (see Section 2.3.3). Economically, issuance costs incurred are attributable to the overall credit facility rather than any specific amount drawn.

At the June 18, 2015, EITF meeting, the SEC staff confirmed that ASC 835-30, as amended by ASU 2015-03, “does not address the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements” and announced that it would “not object to an entity deferring and presenting [such] costs as an asset and subsequently amortizing the . . . costs ratably over the term of the line-of-credit arrangement.” Accordingly, it would generally be appropriate for an entity to present specific incremental costs and fees that are directly attributable to a line of credit or other revolving-debt arrangement as a deferred charge (i.e., an asset) notwithstanding the prohibition in ASC 835-30-45-1A against classifying debt issuance costs as a deferred charge. The presentation of a deferred charge is appropriate irrespective of whether such costs and fees are paid to the creditor or third parties.

Generally, it is appropriate to use a straight-line method of amortizing such fees and costs over the term of the arrangement because the SEC staff announcement refers to amortizing such costs “ratably.” Further, straight-line amortization is supported by analogy to the creditor’s accounting under ASC 310-20-55-8(c), which states:

Under the method outlined by the SEC staff on June 18, 2015, an entity presents unamortized debt issuance costs associated with a line-of-credit or revolving-debt arrangement as an asset even if the entity currently has a recognized debt liability for amounts outstanding under the arrangement. Further, the entity amortizes such costs over the life of the arrangement irrespective of whether it repays previously drawn amounts.

 

Connecting the Dots

In some situations, it may be acceptable to amortize debt issuance costs of revolving-debt agreements over the life of the outstanding debt as opposed to over the commitment period. For example, assume that an entity enters into an arrangement that allows it to issue revolving debt over a period of three years. During this period, the entity may borrow, repay, and reborrow up to $100 million of debt. At the end of the third year, the outstanding amount of debt becomes a term loan that is repayable over five years. If the following conditions are met, recognition of the debt costs over an eight-year period would be acceptable:

• At the end of the third year, it is probable that the entity will have $100 million of debt outstanding that is repayable over a five-year period.
• There are no additional fees or costs incurred when the entity draws amounts on the arrangement, or the outstanding amount becomes a term loan repayable over a five-year period.

Once the outstanding debt becomes a term loan, the entity should use the interest method to amortize the remaining unamortized debt issuance costs over the debt’s five-year term.

This example does not address situations in which an entity incurs additional fees and costs imposed by the lender over the life of the arrangement or in which the amount of the term loan at the end of the revolving-debt period is less than the maximum permitted outstanding debt.

The SEC staff announcement does not address whether other accounting policies might be acceptable (e.g., reclassifying unamortized costs as a reduction of the related liability once amounts are drawn). Entities are strongly encouraged to consult with their accounting advisers before (1) electing an accounting policy that could result in a write-off of remaining unamortized costs before the end of the arrangement’s term or (2) presenting a negative liability balance for the arrangement (e.g., when unamortized costs exceed the amount drawn or previously drawn amounts are repaid).

The guidance in this section does not apply to debt for which the issuer has elected the fair value option in ASC 815-15 or ASC 825-10 (see Section 5.5). If a transaction involves multiple units of account, the issuer should allocate the related issuance costs among those units of account (see Section 3.5).

For a discussion of the accounting for deferred costs and fees associated with a line-of-credit or revolving-debt arrangement upon a modification or exchange of such an arrangement, see Section 10.6.