The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update that will modify the accounting for bond issue costs (BIC). Currently, BIC is reported as a deferred charge in the asset section of the balance sheet and gets amortized separately on the income statement. Under the proposed revised standard, BIC will be treated similarly to a discount or premium and will be reported as an adjustment to the carrying value of the liability. Amortization of BIC will, along with amortization of discount or premium, adjust the amount reported as interest expense.

The journal entry upon issue of a bond will essentially remain unchanged. BIC will be the actual costs incurred, the bond payable will be recorded in its face amount, accrued interest payable will be recognized if the bond is issued between interest dates, cash will be increased for the net proceeds, and the amount required to balance the entry will be recognized as the discount or premium:

Cash - (% face + accrued interest BIC)
BIC
Discount (plug)
        Bond Payable - (Face)
        Accrued interest payable - [face x (stated rate) x (time since last interest paid)]
        Premium - (plug)

Once initially recorded, however, the BIC and the discount or premium will be combined to be treated as a net discount or premium and an effective interest rate will be determined such that the present value of the principal and interest payments to be made will be equal to the net proceeds, excluding any accrued interest payable.

In future periods, interest expense will be calculated by multiplying the carrying value of the bond by the effective interest rate for the time since the last interest payment was made. The difference between that amount and the interest payment will be the amortization of the net discount or premium.

Under proposed new standard Journal Entry at Coupon Payment, Bond Originally Issued at Discount:

Interest expense - (Carrying amount of bond) x (effective rate) x (time since last interest payment)
        Cash - (Face value) x (stated rate) x (time since last interest payment)
        Discount - (plug)

Under proposed new standard Journal Entry at Coupon Payment, Bond Originally Issued at Premium:

Interest expense - (Carrying amount of bond) x (effective rate) x (time since last interest payment)
Premium - (plug) 
       Cash - (Face value) x (stated rate) x (time since last interest payment)

Thus, the unamortized BIC, just like the unamortized discount or premium, will be reported as an adjustment to the carrying amount of the bond on the balance sheet.

Why the change? As the FASB reports in its exposure draft on the topic, this proposed new standard is part of the FASBs Simplification Initiative, the purpose of which is to simplify accounting standards.

When will the proposed change be officially issued? This accounting standards update appears to be set for issuance sometime during the second quarter of 2015.

When will the proposed change become effective? For public companies, the change, if issued, will likely become effective for periods beginning after December 15, 2015 (or calendar year 2016). For private companies, the change will likely become effective one year later, for periods beginning after December 15, 2016. Compliance with the standard would likely require retrospective adjustments to prior-period information.

In addition, voluntary early application may be allowed for the standard, which will be important news regarding its eligibility for testing on the CPA Exam.

When will the proposed change be eligible for testing on the CPA Exam? As per the AICPAs official policy on new pronouncements, if this proposed standard allows for early application, it will be eligible to be tested as early as six months after its issue date.

If the standard is officially issued in April, it could theoretically show up as early as October on the exam. However, the change is more likely to start showing up on the exam in early 2016.

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