Costs associated with the issuance of debt
Ryan Milliron ACC 311

Every established company will require additional capital at some point. They may choose to sell equity, obtain loans, or sell corporate bonds. When they sell bonds they incur an obligation to repay a certain amount, whether with interest or without, as well as administrative costs with the actual sale. The costs associated with either method of issuing bonds are recorded separately and amortized over the contractual life of the debt. For GAAP compliance these costs are debited to an asset account, called the debt issue costs account. IFRS on the other hand, include the costs with issuing the debt by decreasing the cash account, and decreasing the bonds payable by the costs incurred, effectively reducing the amount borrowed (IAS 39). It can be argued that IFRS in principle provides a greater level of understandability by maintaining a level of simplicity, rather than using additional asset accounts for the debt issue costs.
Most companies typically do not sell their bonds to the public directly. Rather, they sell the entire issue to institutions such as investment banks who in turn sell the bonds to the public. The investment banks charge an underwriting fee to the company which may take into account the cost the investment bank pays the company for the bonds, and the re-sale proceeds the bank makes on the sale of the company’s bonds. A company may also choose to sell its debt to either a pension fund or an insurance company. This is known as a private placement, which usually have less issuing costs than having an investment bank underwrite a sale of bonds – due to registration requirements with the SEC for public offerings, and the lack of an underwriting fee to the investment bank (Fung and Rudd).
Under ASC 835-30-35, the costs are capitalized and amortized over the life of the underlying