Q&A: Important Considerations for CDEs Regarding Debt Issuance Costs

Published by JR Aube on Friday, February 3, 2017
Journal thumb February 2017

Question: What new accounting pronouncements could affect my new markets tax credit (NMTC) audits for the year ended Dec. 31, 2016?

Answer: In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs. The amendments in the update are effective for financial statements issued for fiscal years beginning after Dec. 15, 2015, and interim periods within fiscal years beginning after Dec. 15, 2016. Under the new guidance, debt issuance costs related to a recognized debt liability must be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, whereas under former guidance such debt issuance costs were recognized as a deferred charge (that is, an asset). In addition, ASU 2015-03 specifies that amortization of debt issuance costs shall be reported as interest expense. The changes shall be properly disclosed as a change in accounting principle and applied retrospectively to all periods presented in the financial statements.

While it is not typical for NMTC community development entities (CDEs) or their subsidiaries (sub-CDEs) to be financed with debt, it is very common in a leveraged NMTC structure for the investment fund to have debt financing. Additionally, at the project level, most qualified active low-income community businesses (QALICBs) have debt from qualified low-income community investments (QLICIs) and often other sources. Therefore, ASU 2015-03 is likely to affect the financial statements of most NMTC investment funds and QALICBs for the year ended Dec. 31, 2016, but it will ultimately affect any entity carrying debt and unamortized debt issuance costs on its balance sheet.

As an example, consider a typical NMTC investment fund (Fund X). As of Dec. 31, 2015, Fund X had an outstanding note payable in the amount of $5 million and related unamortized debt issuance costs of $50,000. Under former guidance, Fund X’s Dec. 31, 2015, balance sheet would have been presented as follows in Table 1 on the following page.

However, for the year ended Dec. 31, 2016, the new guidance under ASU 2015-03 applies. Assuming $10,000 of debt issuance cost amortization and zero net effect of all other activities during 2016 (for simplicity), the comparative balance sheets of Fund X as of Dec. 31, 2016, and 2015 should be presented as follows in Table 2.

Additionally, on Fund X’s comparative income statements for the years ended Dec. 31, 2016, and Dec. 31, 2015, debt issuance cost amortization should be included in interest expense, whereas under former guidance it was commonly presented separately as amortization expense. Contact a Novogradac & Company LLP professional with any questions about implementation of ASU 2015-03.