In this tutorial, you’ll learn what “Original Issue Discount” or OID on Debt issuances means, and how it works on the financial statements.
What is “Original Issue Discount” or OID on Debt issuances? And how it works on the financial statements?
Short AnswerThe Longer Answer
When there are Mandatory or Optional Repayments on the Debt, you must amortize the OID more rapidly.
Companies call this “Extra Amortization” something like “Loss on Unamortized OID on Repayment,” and it’s based on % Debt Principal repaid in the current year * OID balance after OID Amortization in the current year.
So, if the Beginning OID Balance is $10, and there’s $2 OID Amortization with $20 Repayment in Year 1, it’s ($20 / $100) * $8, or $1.6.
The Amortization of OID itself also changes in this scenario, and it’s now based on -MIN(OID Beginning Balance, OID Beginning Balance / Years Remaining in OID Amortization Period).
The net effect is that instead of straight-line amortizing $2 of OID per year, we amortize a total of $4, then $3, then $2, then $1, then less than $1.
On the financial statements, the “Loss on Unamortized OID on Repayment” counts as another expense on the Income Statement.
Cash Interest, OID Amortization, and Loss on Unamortized OID on Repayment all reduce the company’s Pre-Tax Income, Taxes, and Net Income.
On the CFS, Net Income is lower, and you add back the last two components since they’re both non-cash expenses.
These items boost the company’s FCF because they’re non-cash items that reduce the company’s taxes, similar to Depreciation.
Does OID Really Matter?
In most cases, no, not really.
Most Debt is not issued at a huge discount to par value; the 1-3% range is typical in normal markets.
The company saves a tiny amount on taxes as a result, especially
in countries with relatively low corporate tax rates…
…and it takes a lot of extra work to set up these OID calculations, especially if there are many tranches of Debt.
So, be familiar with OID, but don’t obsess over it. You could easily simplify it or ignore it in case studies and modeling tests and be fine.
Files & Resources
How to Download These Files:
In Firefox, Chrome, and Internet Explorer:
Right click the link and click Save Link As...
Right click the link and click Download Linked File As...