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What is the treatment in the BS for capitalised financing fees? What is the movement on the other side that balances the Balance Sheet? As capitalised financing fees is an asset in the Balance Sheet
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Chiming in as an American, want to be mindful that you chose UK as the location here, as this might be a difference between IFRS and GAAP. I believe capitalized financing fees are a contra liability per FASB, they used to be recorded as an asset. At any rate, their counterbalancing entry is the same. Liabilities have a normal credit balance, so a contra liability has a normal debit balance. Assets have a normal debit balance as well. Therefore, when you pay the fee, you record the following:
Debit Capitalized Financing Fee 100, Credit Cash 100.
The credit is cash. Under current FASB guidelines (where it’s a contra liability), left side of the balance sheet goes down as you pay the fees with cash, right hand side goes down with the recognition of the contra liability. Under prior FASB guidelines where capitalized financing fees were assets, the counterbalancing stayed all on the left hand side of the balance sheet. Record an asset for the fees, and lower cash by the same amount. Hope this helps.
Thanks @pipo1001, this is super helpful.
My concern comes from (doing it the "UK way"): If you do a refinancing in year 2025 (imagine you have entered the company as a PE in 2023 rolling over the existing debt), and you incur in that upfront/arrangement/financing fee of 1.5% * (debt refinanced), how do you handle that "debit" or decrease in Cash?
Upfront fees are amortised (in the D&A schedule) and included only the amortisation (as a negative) in the P&L, then added back in the CFS (non-cash item), and you include for Year 1 Balance Sheet the total Upfront fee (minus amortisation of Year 1), whereas what would you do with Cash, why do you imply the movement in Cash and how would it be done in the 3-statements?
Thanks very much!
In 2025, cash go down by 15 as you pay the upfront fee, and a contra-liability of -15 would be created on the liabilities side. Assuming a 3y amortisation period on the debt fee, cash go up 5 in 2026 (add-back in CFS from P&L) and the contra-liability would be amortised by 5 to equal -10.
Both sides change with the same amount. This is a simple explanation and does not include tax or other p&l effects.
Thanks for your clarification. However, how do put in an excel "cash go down by 15 as you pay the upfront fee", where do you put the costs, in the P&L? As you are already including the amortisation there each year (3 years if tenor = 3). So that then BS matches via flows in P&L and CFS
Not sure if I follow exactly. The first amortisation charge would incur in 2026, the period after the upfront fee is paid / refi. Think of it just like depreciation of capex.
In reality, the lender would most likely deduct the fee from the principal being paid out to the company, but for modelling purposes you could add it as a separate line item under cash flow from financing in the CFS. Only the amortisation (with start from T+1) will flow through the P&L
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