debt issuance costs
Debt Issuance Costs
The debt that is borrowed by a business or an individual is principally charged with two types of debt issuance costs, namely, interest rates and closing costs which sometimes are also known as extra costs.
- The companies issue a specified debt instrument, which is also often termed as a security, against an investment, in order to raise capital. Instead of shares, often bonds, promissory notes and debentures are also issued. In such a case, a dividend is paid as the debt issuance cost against the capital borrowed. This premium is paid on a yearly basis, out of profits to all stakeholders.
- The second type of debt is of course the loan. The debt costs of loans, consists of interest and closing costs which are sometimes also known as origination fees. The interest is paid for a prolonged time, as opposed to the closing costs that are paid in a single installment.
- Accounting considers all debt related costs to be long term expenditures and just like interest costs, the closing and one time costs are also treated as long term expenditures.
- The debt cost amortization is a process where all cost relating to issuance of debt are phased out over a few years time. In such a case if the closing costs, amount to $5,000 for a loan of 5 years then $1000 is paid every year, or the company accounts are adjusted accordingly. In such cases, this accounting treatment is also termed to be deferred debt costs.
- The issuance costs tax treatment is different and, as per the Internal Revenue Service (IRS), most of the issuance costs are tax-free, especially the interest.