Quick technical question regarding the correct treatment of debt tranches with OIDs on the pro forma balance sheet.
The precedents I have found within my team reflect the debt amount correctly, (i.e. less the OID on the PF balance sheet), but then appear to calculate goodwill incorrectly (i.e. the delta to make the balance sheet balance), whereas when calculated correctly this leaves it unbalanced by the OID amount.
E.g. $100m with 1% OID is reflected as debt of $99 on the PF balance sheet, and when correctly calculating goodwill rather than using it as the balancing item as it currently is, the model is out of balance by 1.
Any responses as to how this should be treated correctly would be greatly appreciated.
Correct me if I'm wrong but I think you book debt at par in this example.
Scenario: $100MM loan, 1% OID, no other fees or costs.
Assets: - Cash up by $99MM ($100MM - (1% * $100MM)) - Deferred financing expenses up by $1MM (1% * $100MM)
Liabilities: - Debt up by $100MM
$100MM = $100MM
This. The OID amount is like a non-cash expense that is amortized over the life of the loan (I am sure some accountant will come out and beat me over the had for saying that). Balance sheet account should reflect this and will hopefully make your BS balance and decrease over time.
Good luck.
You will also frequently see OID as a contra liability. So in this case accountants book the $100mm liability but also a negative ($1) on the liability side without the corresponding asset account for deferred financing. I think it sometimes depends on what type of fee / OID is booked and tax treatment
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