Every company in the world must raise funds in order to finance its operations and expansion. The most common form of this funding is through the use of long-term debt. Depending on where the company does business and who uses their financial statements, there are different ways of recording this debt through the use of United States Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). The main differences between the two accounting standards, with regards to long-term debt recognition, deal with debt issue costs and convertible bonds.
Debt issue costs are the payments associated with issuing debt, such as various fees and commissions to third parties. According to U.S. GAAP these payments generate future benefits that under ASC 835-30-45-3 are recorded on the balance sheet as deferred charges. These charges are capitalized, reflected in the balance sheet as an asset, and amortized over the life of the debt instrument. Early debt repayment results in expensing these costs. Under IFRS costs are deducted from the carrying value of the financial liability and are not recorded as separate assets. Rather, they are accounted for as a debt discount and amortized using the effective interest method. (IAS 39, par 43)
The debate between which set of standards correctly portrays the financial implications of these costs is centered on the idea of matching expenses and revenue. Those for U.S. GAAP argue that the deferred costs create an asset to which we can then match the revenue with the expenses over the useful life of the debt. This is in compliance with the matching principle of the conceptual framework for financial accounting. Under IFRS the costs are said to be immaterial and do not require consideration of the matching principle. This brings up possible issues of managed earnings based on when companies are issuing debt and when they...