Questions on accounting for OID in BS adjustments and asset capitalization

Should you account for OID by netting it against the par value of the debt (so if company does LBO with 500M in term loan and OID of 6M, then record 494M in debt incurred) or can I record it as a capitalized asset the same way as you would with financing fees?

Also, Im in general confused about what a capitalized asset is and when to record an item as capitalized asset vs. expense. Isn't financing fees a one-time expense so why isnt it taken out of retained capital the same way it is for advisory fees?

I know in tech start-ups, the term capitalized R&D comes up frequently, but I don't know when a company would choose to capitalize its R&D vs. report it on the IS as regular R&D. Is it just to inflate NI given that R&D likely makes up a big chunk of expenses for a tech start-up? But it would also result in a huge dip in FCF since capitalized assets must be included in the calculation given that they are cash spends right?

 
Most Helpful

Should you account for OID by netting it against the par value of the debt (so if company does LBO with 500M in term loan and OID of 6M, then record 494M in debt incurred) or can I record it as a capitalized asset the same way as you would with financing fees? i think either would get you to same result but former (treating it as contraliability) is how it works in real life

Also, Im in general confused about what a capitalized asset is and when to record an item as capitalized asset vs. expense. Isn't financing fees a one-time expense so why isnt it taken out of retained capital the same way it is for advisory fees? Same reason capex isn't taken out as a one time hit - you get the benefit of financing over the life of the loan, so you should amortize the cost of obtaining it over the same time horizon to better reflect economic reality

I know in tech start-ups, the term capitalized R&D comes up frequently, but I don't know when a company would choose to capitalize its R&D vs. report it on the IS as regular R&D. Is it just to inflate NI given that R&D likely makes up a big chunk of expenses for a tech start-up? But it would also result in a huge dip in FCF since capitalized assets must be included in the calculation given that they are cash spends right? if you capitalize R&D you amortize its value over time so you're not really inflating anything, you're deferring recognition of it over its useful life

 

thanks for clearing up my questions. My point on R&D isnt that it is inflating any financial performance persay, but that theres a big difference between IS and CF because it is capitalized. Am i correct on that capitalized assets must be adjusted for in FCF (cash flow from investing activities)?

 

Sed adipisci aut et similique ducimus dolore eius expedita. Nam facilis vel necessitatibus assumenda cupiditate quod. Ut reprehenderit exercitationem est minima. Occaecati libero adipisci enim repudiandae cum reprehenderit dolorem non.

Facilis repudiandae voluptate ut perspiciatis veritatis natus. A deleniti voluptatem id est ratione. Quidem quis dicta nisi harum voluptatem impedit. Qui eligendi aspernatur temporibus libero nostrum ullam repellat. Occaecati consequatur aliquam sint odio placeat est.

Voluptas et saepe molestiae quia dolores recusandae. Amet explicabo dolor aliquid ab.

Accusantium sed consequatur illum fugit sed repellat recusandae. Vitae nisi corrupti qui officiis culpa sequi voluptatem. Voluptatem corporis ratione eius dolores est dolores consequatur.

Career Advancement Opportunities

May 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 99.0%
  • Warburg Pincus 98.4%
  • KKR (Kohlberg Kravis Roberts) 97.9%
  • Bain Capital 97.4%

Overall Employee Satisfaction

May 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 98.9%
  • KKR (Kohlberg Kravis Roberts) 98.4%
  • Ardian 97.9%
  • Bain Capital 97.4%

Professional Growth Opportunities

May 2024 Private Equity

  • The Riverside Company 99.5%
  • Bain Capital 99.0%
  • Blackstone Group 98.4%
  • Warburg Pincus 97.9%
  • Starwood Capital Group 97.4%

Total Avg Compensation

May 2024 Private Equity

  • Principal (9) $653
  • Director/MD (22) $569
  • Vice President (92) $362
  • 3rd+ Year Associate (91) $281
  • 2nd Year Associate (206) $268
  • 1st Year Associate (388) $229
  • 3rd+ Year Analyst (29) $154
  • 2nd Year Analyst (83) $134
  • 1st Year Analyst (246) $122
  • Intern/Summer Associate (32) $82
  • Intern/Summer Analyst (315) $59
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Secyh62's picture
Secyh62
99.0
5
dosk17's picture
dosk17
98.9
6
GameTheory's picture
GameTheory
98.9
7
kanon's picture
kanon
98.9
8
CompBanker's picture
CompBanker
98.9
9
bolo up's picture
bolo up
98.8
10
numi's picture
numi
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”