Treatment of fees in LBO
Transaction fees: expensed immediately in transaction. I've seen this done as a reduction to equity but also an add-back into Goodwill. The balance sheet balances in either situation but the difference is that add-back to GW results in larger balance sheet (greater asset/L+E amount) compared to reduction to equity. Any idea which method is the correct one to use for modeling exams?
Debt financing fees: these are set up as a deferred financing fee. I've seen this done as a long-term asset but in one situation as a contra-liability (negative amount) pro forma. I'd assume putting it as a long-term asset that amortizes downwards over time is more common than a contra-liability that amortizes to zero. What's the intuition for the contra-liability method and any idea if this is even correct?
Accounting for debt financing fee amortization: where does the annual amortization occur? I've been doing it as part of the interest line calculation. Should this be part of amortization in D&A along with amortization of intangible write-ups? This is important because depending on which method is used, you'll have different EBIT figures (although EBITDA should be the same).
Should not matter - both are correct.
DFF should appear in CFS, BS, and in the interest line.
Also note that advisory fee = transaction fee. Financing fees on debt are amortized. Big conceptual difference here.
My bad. I meant advisory fees on the debt issuance (should have just said debt financing fees). So you're saying that the amortization of financing fees should be part of the interest expense? Or another separate line? This is important as then the coverage ratio calculation would be affected...
Yes financing fees amortization are included in interest expense on the income statement - remember to add back on the CFS as it's non-cash. MultipleExpansion shows this exact scenario in their 3 statement LBO
Agree with above poster.
Re debt financing fees: before 2015, they were treated as an asset and amortized over the life of the loan, so you probably are seeing this in files that were created before then. The correct way to model now is to deduct the financing fee directly from the liability as a contra-liability. See more here: https://www.wallstreetprep.com/knowledge/debt-accounting-treatment-fina…
Thanks. Can you speak a bit more on treatment of fees for the revolver?
To my understanding, the revolver has two types of "fees" (financing fee at close and commitment fee on undrawn portion) whereas the other types of debt financing have only one. The WSP link you provided states that for the revolver fees are capitalized and amortized. Which fees do they refer to? The commitment or the financing or both?
Moreover, the financing fee amortization is recorded as non-cash expenses as part of interest expense. If the commitment fee were to be capitalized and amortized, how would it show up on the balance sheet (contra-liability against the revolver or as an long-term asset) and would its amortization be a non-cash expense as part of interest expense? Further, the commitment fee is paid on undrawn portions of the "commitment"/total balance limit of the revolver, so how would you reflect the revolver being drawn down and then repaid throughout the years in terms of a potentially capitalized asset?
Earum totam esse voluptas in. Qui reprehenderit soluta non incidunt architecto nesciunt consequuntur qui. Expedita voluptatibus adipisci harum quibusdam atque a delectus eaque. Aut eos autem sapiente assumenda in. Optio nam dolorem amet.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...