Introduction
At the end of 2025, TransUnion owed lenders about $5.1 billion under its term loans, but its balance sheet carried that debt $29.8 million lower, net of unamortized original issue discount (OID) and deferred financing fees. The gap was what remained of the discounts lenders had taken and the fees the company had paid when the loans were arranged and refinanced. It shrinks a little every quarter, as the costs flow into interest expense, and it disappears at once when a loan is repaid early: in 2024, TransUnion expensed $17.8 million of such balances when it prepaid and refinanced loans.
Two costs of borrowing behave this way. They are not interest in the contractual sense, but the accounting treats them as part of the cost of the debt, spread over its life. The basic measurement of debt they modify is covered in debt accounting: carrying value and interest expense.
Discounts and Fees
When a leveraged loan or high-yield bond is issued, lenders often pay less than the face amount. A term loan issued at 98 delivers $98 of cash for every $100 the borrower must repay. The $2 gap is the original issue discount, and it is a way to give lenders extra yield without raising the stated interest rate.
- Original issue discount
The difference between the face amount of a debt instrument and the price at which it is issued, when the price is below face. It is extra return for the lender and extra cost for the borrower, recorded as a reduction of the debt's carrying amount and amortized into interest expense over the life of the debt.
Issuance costs are the third-party fees of raising the debt: arrangement and underwriting fees, legal and accounting costs, and rating agency fees. Under Accounting Standards Update (ASU) 2015-03, now part of Accounting Standards Codification (ASC) 835-30, they are presented the same way as a discount, as a direct deduction from the carrying amount of the debt rather than as a separate asset. The main exception is a revolving credit facility, which may have nothing drawn: under Securities and Exchange Commission (SEC) staff guidance that ASU 2015-15 added to the codification, its costs can be carried as an asset and amortized ratably over the term of the facility, whether or not it is drawn.
- Deferred financing fees
The common name for debt issuance costs that have been paid but not yet expensed: arrangement, underwriting, legal and similar fees of raising debt. Under US generally accepted accounting principles (GAAP) they reduce the carrying amount of the related debt, or sit in other assets for a revolving credit facility, drawn or not, and are amortized into interest expense over the life of the borrowing.
Other Sources of Discount
A discount can also arise without a price below par. When debt is issued together with warrants or other instruments, the proceeds are split between them, usually by relative fair value, and the amount allocated to the warrants leaves the debt recorded below face. Zero-coupon bonds consist entirely of discount, accreting to face with no cash interest at all. New debt issued in an exchange that is accounted for as an extinguishment of the old debt is recorded at its fair value, which sits below face when the borrower's credit has weakened. Debt issued above par works the other way: the premium is added to the carrying amount and amortized as a reduction of interest expense.
A Term Loan With OID and Fees
Suppose a company borrows under a seven-year term loan with a face amount of $1,000 and an 8% interest rate. Lenders fund at 98, and the company pays $15 of arrangement and legal fees:
| Line item | Amount |
|---|---|
| Face amount owed to lenders | 1,000 |
| Original issue discount, 2 points | (20) |
| Issuance costs paid | (15) |
| Cash received and initial carrying amount | 965 |
| Annual cash interest at 8% of face | 80 |
| Effective interest rate | 8.7% |
| Interest expense in year 1 at the effective rate | 84 |
| Discount and costs amortized in year 1 | 4 |
The effective rate is the rate that discounts seven years of 80 interest and the 1,000 repayment back to 965. Amortization rises each year as the carrying amount grows toward 1,000; straight-line amortization would be 5 a year. Scheduled amortization of principal is ignored.
The company receives $965 but owes $1,000. Its carrying amount starts at $965 and accretes to $1,000 over seven years. Each year, interest expense exceeds cash interest by the amortization of the discount and costs, so the debt's all-in cost, about 8.7%, is higher than its 8% coupon. Because the effective interest method applies the effective rate to a growing balance, amortization starts at about $4 and rises; many companies use straight-line amortization where the difference is immaterial.
Where the Costs Show Up
In the income statement, the amortization sits within interest expense, often disclosed separately. In the cash flow statement, it is added back to net income in operating activities as a non-cash charge, while the financing section shows the debt proceeds net of the discount and the fees paid. Over the life of the loan in the example, the effects add up as follows:
| Statement | At issuance | Each year | At maturity |
|---|---|---|---|
| Balance sheet | Debt recorded at 965 | Carrying amount rises by the amortization | Carrying amount reaches 1,000 |
| Income statement | No effect | Interest expense of 80 cash plus amortization | Total expense of 595 over seven years |
| Cash flow statement | Financing inflow of 965 | Operating outflow of 80; amortization added back | Financing outflow of 1,000 |
For tax, original issue discount is generally deductible as it accrues over the life of the debt, under a constant-yield method similar to the book treatment, so it creates little book-tax difference.
When Debt Is Repaid Early
If a loan is repaid or refinanced before maturity, the unamortized discount and costs no longer have a period to be spread over. They are written off at once, as part of the gain or loss on extinguishment.
TransUnion's 2025 annual report shows how routine this is for a frequent borrower. Its 2024 prepayments and refinancings expensed $17.8 million of unamortized discount, fees and related costs, and a 2024 prepayment of $150 million of one term loan from cash on hand wrote off $0.3 million. Because the write-off depends on refinancing activity, it makes reported expense lumpy from year to year, which is why TransUnion adds it back in its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and adjusted net income, as bankers usually do. Whether a refinancing counts as an extinguishment or a modification, which decides whether fees are written off or carried forward, is covered in refinancing and extinguishment gains and losses.
OID and Fees in Deal Models
In a leveraged buyout (LBO), discounts and fees change the financing arithmetic in three ways:
- Proceeds: a loan issued at 98 funds only 98% of its face amount, so raising $980 of cash requires $1,000 of principal, and the discount appears as a use of funds.
- Fees: arrangement and underwriting fees are another use of funds in the sources and uses table, amortized in the model over the life of the debt.
- Yield: lenders and arrangers translate OID into yield by spreading it over an assumed life, so one point of discount over a three-year life adds roughly 33 basis points to the all-in yield.
The sources and uses table that captures these items is explained in sources and uses of funds in an LBO.
The Other Side of the Loan
For the lender, the same discount is extra income, recognized over the loan's life as part of its yield under the effective interest method, which is why private credit funds and other direct lenders report interest income above the cash coupons they receive. If the loan is repaid early, the lender recognizes the remaining discount at once, the mirror image of the borrower's write-off, and any prepayment premium on top.
For the borrower, the discount is a real cost of capital, paid up front in reduced proceeds rather than over time in higher coupons. The accounting simply makes sure that cost appears in interest expense, period by period, rather than all at once on the day the loan is signed.
