When in an LBO Modelling test, if no indications are given in the prompt, should we assume that financing fees are being capitalised or not?
If so, when putting together the post-transaction BS, should we assume that those are being accounted for in the Assets or in the Liabilities section? I have seen it both ways and can't seem to get my head around it
Any help would be much appreciated.
Thank you
Assume they are capitalized and make them a contra account in liabilities i.e a debit in pro forma B/S adjustment.
So a contra liability has the same effect as putting them as an asset? Why not just put on asset side? Thanks
It used to be an asset until 10 years ago or so, now it is a contra-liability. People that still put it as an asset make a mistake, which is very common.
This is a modelling simplification which is accurate enough given the relatively small size of the transaction fees.
In reality there is no contra-liability, the carrying value of debt is net of transaction fees, and transaction fees are amortised via the effective interest rate method charged in the P&L. The difference between interest expense and interest payable is effectively the amortisation of transaction fees, and the carrying value converges to the outstanding debt balance over time.
Thank you so much for your answer. In case where we are told that financing fees are not being capitalised, how should we treat those further in the model? Assume they are still a contra-liability in the pro forma balance sheet but then is there any other adjustments necessary throughout the model?
Thank you
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