Amortization Schedule – Debt Issuance costs on Term Loans

Download our Free Term Loan Amortization Schedule Including Amortization of Debt issuance Costs and Revolving Debt (Click Here: Term Loan & Revolver Amortization Schedules instructions noted below)

Amortization of Debt Issuance Costs

In instances when debt is issued, there are costs associated with the issuance that may be capitalizable under US GAAP.  While we won’t cover the particular capitalizable costs in this blog posting or cover classification of these costs (we’ll highlight these items in a subsequent blog post), we’ll cover how these costs should be amortized for term loans and revolvers.

First, let’s take a look at the relevant guidance within the Accounting Standards Codification (ASC) for term loans:

ASC 835-30-35-2: With respect to a note for which the imputation of interest is required, the difference between the present value and the face amount shall be treated as discount or premium and amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period.  This is the interest method.

ASC 835-30-35-4: Other methods of amortization may be used if the results obtained are not materially different from those that would result from the interest method.

Key takeaways from the guidance above:

The above guidance indicates that the interest method, also known as the effective interest method, must be used to amortize the debt issuance costs.  However, if another method does not result in a material difference from the effective interest method, it may be used.  The alternative method is typically the straight-line method. 

Note that this guidance does not apply to debt recorded at fair value, but only debt recorded at cost.  Further, the above guidance is applicable for term debt issued at a discount (AKA an original issue discount (OID).

For revolvers, amortization of debt issuance costs is straight-line in nature.  For both term loans and revolvers, the amortization period of the debt issuance costs is generally the contractual length of the debt. 

Spreadsheet for Amortization and instructions (CLICK HERE FOR FREE SPREADSHEET)

The attached file is a standard amortization template that is used for term loans and revolvers. 

The first tab of the file is used for term loans and / or revolvers using the straight-line method, while the second tab is used for term loans using the effective interest method.

First Tab –  term loans and / or revolvers using the straight-line method

The first tab is more simplified than the first as only a few inputs are necessary.  The key inputs include the total amount of debt issuance costs and the months of amortization.  Note that if the months of amortization vary from this standard template, which uses 60 months, additional months can be added or months can be taken away.  A good check is to ensure that the ending balance of the debt issuance costs, net (column G) is $0 in the last period of amortization.

Second Tab – Effective Interest Method

The second tab has a bit more going on than the first tab due to the effective interest method being used.  The inputs in this tab include the face amount of the term loan, the total debt issuance costs, the stated interest rate at the time of issuance, and the payment schedule (column E).  Similar to the first tab, this schedule is formula-driven but there may be some edits needed to ensure formulas carry down to the bottom if the contractual period of the loan differs from five years.  To calculate amortization (column I), the use of a formula called Goal Seek is necessary. 

Goal Seek – Excel How To

Goal Seek enables amortization to be calculated and sum, in total, to the total debt issuance costs, by changing the effective interest rate.  This functionality can be found in the “Data” tab and then “What if Analysis”:

Once selected, a box will pop up with three fields to populate.  In summary, we want to set the sum of column I (the amortization of debt issuance costs) equal to the total debt issuance costs by changing the effective interest method.  Using the example file attached, the Goal Seek pop up would be populated as follows:

There are a couple of checks that can be used to ensure the calculations are working properly; columns J, K, and P should all have a $0 balance in the last period of amortization.

One nuance to think about is whether the interest rate for the term loan will remain the same throughout the contractual life of the debt (a fixed rate) or will change (a variable rate). If the interest rate is fixed, this schedule can be set up at inception of the agreement with no changes subsequently required.  If the interest rate is variable (an example is if LIBOR is used), the schedule may need to be updated monthly.  To update in this scenario, copy and paste values of all previous months, update the stated interest rate, and then re-run the Goal Seek formula. 

For more information on this or, for any of your accounting or decision making needs, schedule a FREE CONSULTATION with us at www.BalancedSolutions.io.

18 thoughts on “Amortization Schedule – Debt Issuance costs on Term Loans”

  1. Hello! I’m at work surfing around your blog from my new apple iphone!
    Just wanted to say I love reading your blog
    and look forward to all your posts! Carry on the fantastic work!

  2. Nice post. I learn something new and challenging on websites
    I stumbleupon on a daily basis. It’s always exciting to read content from other authors and use a little
    something from other websites.

  3. Have you ever thought about adding a little bit more
    than just your articles? I mean, what you say is valuable
    and everything. But imagine if you added some great pictures or
    video clips to give your posts more, “pop”! Your content is excellent but with
    images and videos, this blog could certainly be one of the most beneficial
    in its field. Fantastic blog!

  4. I’ve been surfing online more than three hours today, yet I never found any interesting article like
    yours. It’s pretty worth enough for me. In my opinion, if all web owners and bloggers made good content as you did, the internet will be much more useful than ever before.

  5. An outstanding share! I have just forwarded this onto a co-worker who had been conducting a little homework on this.

    And he in fact ordered me lunch simply because I discovered it for
    him… lol. So let me reword this…. Thanks for the meal!!
    But yeah, thanx for spending some time to talk about this
    matter here on your site.

  6. I think this is among the most important info for me. And i’m glad reading your article.
    But wanna remark on few general things, The site style is
    perfect, the articles is really excellent : D. Good job, cheers

  7. Hey! This post couldn’t be written any better! Reading
    this post reminds me of my good old room mate!

    He always kept chatting about this. I will forward this
    post to him. Pretty sure he will have a good read.
    Thank you for sharing!

Leave a Comment

Your email address will not be published. Required fields are marked *