Debt issuance costs look small on a loan closing statement and cause outsized trouble in the file. They land in the wrong place on the balance sheet, they get amortized straight-line when the difference is no longer immaterial, and they stay on the books after a payoff. The rules sit in ASC 835-30, and the mechanics are short enough to run in a workpaper.
This guide covers what counts as an issuance cost, how it is presented, how to amortize it, how revolvers differ from term loans, and the entries for the amortization and the early payoff. For fee treatment when a loan is refinanced, see /us/blog/asc-470-debt-modification-vs-extinguishment-10-percent-test.
What is a debt issuance cost?
A debt issuance cost is a specific incremental cost, other than one paid to the lender, directly attributable to issuing the debt, such as legal and underwriting fees paid to third parties. KPMG's handbook gives accounting or legal fees, fees to investment bankers, underwriters or agents, document preparation or printing costs and rating agency fees as examples. Fees paid to the lender can create a debt discount. Internal compensation and bonuses paid to employees for raising funds do not qualify and are expensed.
A discount is the excess of the amount repayable at maturity over net proceeds after expense. A premium is the reverse.
Where do the costs go on the balance sheet?
Issuance costs, discounts and premiums are a direct deduction from (or addition to) the face amount of the note, as ASU 2015-03 requires. A trial balance that carries "deferred financing costs" as an asset against a term loan is a presentation error.
If the debt is measured at fair value under ASC 825, issuance costs are expensed immediately. Costs incurred before the debt is drawn, for example on an undrawn line, are generally deferred and applied against the proceeds when they arrive.
How are the costs amortized?
ASC 835-30 calls for the interest method: a constant rate applied to the outstanding carrying amount at the start of each period. KPMG describes the objective as a constant cost of borrowing from inception until the estimated date the funds must be returned. Straight-line amortization is acceptable only when the result is not materially different from the interest method, and that assessment is repeated each period.
The amortization period is usually the stated term. KPMG notes the estimated repayment date can differ from stated maturity when the debt has a call or put option. Amortization can be capitalized as interest under ASC 835-20; see /us/blog/asc-835-20-capitalized-interest-worked-example.
Do revolvers follow the same rule?
Not in the same way. Fees on a line of credit buy access to capital, and they are owed even when nothing is drawn. ASU 2015-15 records the SEC staff view that it would not object to deferring these costs and presenting them as an asset, then amortizing them ratably over the term of the arrangement, whether or not there are borrowings outstanding. KPMG adds that the asset presentation is not mandatory: another rational, consistently applied presentation is acceptable. Other periodic fees on a line of credit are generally expensed as incurred.
Worked entries
An illustration. A company issues a $1,000,000 five-year note with a 6 percent annual coupon, paid each year. It pays $40,000 of legal and underwriting fees to third parties, so net proceeds are $960,000. The effective rate that equates $960,000 to the five coupons and the principal is about 6.975 percent.
At issuance:
| Account | Debit | Credit |
|---|---|---|
| Cash | 960,000 | |
| Unamortized debt issuance costs (contra to note) | 40,000 | |
| Note payable | 1,000,000 |
Effective interest schedule (rounded to the dollar):
| Year | Opening carrying amount | Interest expense | Coupon paid | Amortization | Closing carrying amount |
|---|---|---|---|---|---|
| 1 | 960,000 | 66,959 | 60,000 | 6,959 | 966,959 |
| 2 | 966,959 | 67,445 | 60,000 | 7,445 | 974,404 |
| 3 | 974,404 | 67,964 | 60,000 | 7,964 | 982,367 |
| 4 | 982,367 | 68,519 | 60,000 | 8,519 | 990,887 |
| 5 | 990,887 | 69,113 | 60,000 | 9,113 | 1,000,000 |
Straight-line would charge $8,000 a year. The year 1 difference is $1,041, which matters only if it is material to the statements, and the test repeats each year.
Year 1 interest entry:
| Account | Debit | Credit |
|---|---|---|
| Interest expense | 66,959 | |
| Cash | 60,000 | |
| Unamortized debt issuance costs | 6,959 |
Now suppose the company repays the note at par, $1,000,000, at the end of year 2. The carrying amount is $974,404, so $25,596 of costs is unamortized. Unamortized amounts are expensed as part of the extinguishment gain or loss.
| Account | Debit | Credit |
|---|---|---|
| Note payable | 1,000,000 | |
| Loss on extinguishment of debt | 25,596 | |
| Cash | 1,000,000 | |
| Unamortized debt issuance costs | 25,596 |
Audit angle
What the auditor tests:
- Classification of each cost. Trace the closing statement to three buckets: lender payments (discount), third-party costs (issuance costs) and commitment fees on revolvers (asset). The lender versus third-party split drives everything else.
- Presentation. Issuance costs on term debt are netted against the note, not carried as an asset.
- Recomputation. Rebuild the effective rate from the net proceeds, coupon and maturity, and recompute interest expense. If management used straight-line, quantify the difference against materiality, using the guidance in /us/standards/au-c-320.
- Payoffs, refinancings and put dates. For each debt activity in the year, check that unamortized costs were handled in line with the modification or extinguishment conclusion.
- Revolver fees. Check that the amortization period equals the access period, and test that costs were not left on the books after the facility was terminated.
- Disclosure. The interest method and the effective rate in the debt note, and the maturities schedule.
Common misstatements: lender fees treated as issuance costs, deferred financing costs presented as an asset against term debt, costs never written off after a payoff, and revolver fees presented inconsistently from year to year without a documented policy.
Questions auditors ask
Is straight-line amortization ever acceptable?
Yes, when it does not produce a materially different result than the interest method. The conclusion has to be reassessed in every period, so keep a short comparison in the file.
What if the debt is carried at fair value?
Issuance costs are expensed immediately. There is nothing to amortize.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- KPMG, Handbook: Debt and equity financing (types of issuance costs, effective interest method, line-of-credit fees, fair value option): https://kpmg.com/us/en/frv/reference-library/2025/handbook-debt-and-equity.html
- FASB, Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs: https://storage.fasb.org/ASU%202015-03.pdf
- FASB, Accounting Standards Update 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements: https://storage.fasb.org/ASU%202015-15.pdf
- PwC Viewpoint, Financing transactions guide, 1.2 Term debt: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/financing_transactio/financing_transactio_US/chapter_1_debt_instr_US/12_term_debt_US.html
- PwC Viewpoint, Financing transactions guide, 1.3 Lines of credit and revolving-debt arrangements: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/financing_transactio/financing_transactio_US/chapter_1_debt_instr_US/13_lines_of_credit_a_US.html
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