provides guidance on the amortization of a debt discount or premium.
With respect to a note for which the imputation of interest is required, the difference between the present value and the face amount shall be treated as discount or premium and amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period. This is the interest method.
Although ASC 835-30-35-2
requires the use of the interest method for the amortization of debt discount and premium, ASC 835-30-35-4
indicates that other methods of amortization, including the straight-line method, may be used if the results obtained are not materially different from those that would result from use of the interest method. These differences should be analyzed each period for materiality.
With regard to the length of the amortization period, it is not clear whether ASC 835-30-35-2
is referring to the contractual life of an instrument or some shorter period. Although it is commonly understood to mean the contractual life, depending on a debt instrument’s terms and features, it may be appropriate to amortize any discount or premium over a shorter period.
We believe a shorter amortization period, such as the period from the issuance date to the date a put is first exercisable, is appropriate when a lender can demand repayment in circumstances outside of a reporting entity’s control. Using a shorter amortization period ensures that there will be no extinguishment gain or loss in the event a lender exercises its put option prior to the contractual maturity of the debt. However, amortization over the contractual life of a debt instrument is also permitted.
In most cases, debt issuance costs are amortized over the same period as debt discount or premium. This approach is supported by guidance in ASC 470
, CON 6
, and other accounting literature. When a debt instrument is puttable by a lender at a price less than the par value, it may be appropriate to use a different amortization period for debt issuance costs than the debt discount and premium. See FG 188.8.131.52
for further information. When there is more than one amortization period that is acceptable, a reporting entity should elect a method, apply it consistently, and disclose it.
As discussed in ASC 835-30-35-5
, the amount chargeable to interest expense pursuant to ASC 835-30
(e.g., amortization of debt discount or premium) is eligible for inclusion in the amount of interest cost capitalized in accordance with ASC 835-20
If a debt instrument is accounted for at fair value under ASC 825
, the issuance costs should be immediately expensed. Further, debt discount or premium should not be recorded. To the extent the allocated proceeds received differ from the fair value of the debt instrument, the difference should be recorded in the income statement. See FG 1.5
for information on accounting for debt at fair value.