discuss the treatment of bond issue costs under ifrs. what is the discount or premium on the bo

The resulting premium or discount is in the form of interest accumulated and amortized over the life of the bond. The accounting treatment for the issuance of bonds will depend on the amortization of interest and the issue price of the bonds. In most cases, bonds will be issued at other than the par value.

Full Answer

How are bond issue costs treated on the balance sheet?

The costs associated with issuing bonds are debited to a contra liability account such as Bond Issue Costs. Over the life of the bonds, the issue costs must be systematically moved from the balance sheet to the income statement.

What is the accounting treatment for the issuance of bonds?

The accounting treatment for the issuance of bonds depends on whether the bonds are issued at par, a discount, or a premium. The bond issuing companies will record the transactions for the bond principal and the interest payments separately. Let us discuss what is the issuance of bonds and what is the accounting treatment for them.

Are bond issue costs amortized or written off?

The amount in the account Bond Issue Costs will be amortized (systematically written off) to interest expense over the life of the bonds. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

Where do bond issuance costs appear on the income statement?

The amount of bond issuance costs charged to expense appears in the income statement in the period in which the charge is recognized.

What is the treatment of bond issue cost?

Bond Issue Costs include the professional fees and registration fees associated with the issuance of bonds. The amount in the account Bond Issue Costs will be amortized (systematically written off) to interest expense over the life of the bonds.

How are bond issue cost treated and presented in the financial statements?

To account for the expenses associated with bond issuance, debit the debt issuance costs account and credit the accounts payable account to account for the associated liability. Since the debt issuance account is an asset account, the issuance costs will first be recorded in the balance sheet of the bond issuer.

How are the costs of issuing a bond accounted for?

The costs associated with issuing bonds are debited to a contra liability account such as Bond Issue Costs. Over the life of the bonds, the issue costs must be systematically moved from the balance sheet to the income statement. (Accountants refer to this as amortizing the costs.)

How should discount on bonds payable be reported on the financial statements premium on bonds payable?

Discount (premium) on bonds payable should be reported in the balance sheet as a direct deduction from (addition to) the face amount of the bond. Both are liability valuation accounts.

What best describes the discount on bonds payable account?

What is the Discount on Bonds Payable? The discount on bonds payable is the difference between the face amount of a bond and the reduced price at which it was sold by the issuer. This happens when investors need to earn a higher effective interest rate than the stated interest rate associated with a bond.

Which of the following is true of a premium on bond payable?

Answer and Explanation: It is true that a premium on bonds payable d) decreases when amortization entries are made until its balance reaches zero at the maturity date. The premium is tracked by both investors and issuers of bonds and it is a contra-liability account.

How do you account for bond issue?

Record a debit to the Cash account and a credit to Bonds Payable, both for the total face value of the bonds issued. To record the sale of a $1000 bond, for example, debit Cash for $1000 and credit Bonds Payable (a long-term liability account) for $1000.

What are debt issue costs and how should they be reported?

Debt issuance costs are those associated with issuing loans and bonds, such as fees and commissions paid to investment banks, law firms, auditors and regulators. Current U.S. generally accepted accounting principles (GAAP) require different presentation for debt discounts or premiums and debt issuance costs.

What are issue costs?

Issue costs are one-time costs that are incurred while raising funds by debt and equity financing for a project. As the name suggests, every company needs to spend money while issuing securities in the stock exchange. It is incurred while offering the IPOs or raising debt from the market through issuance of securities.

How are discounts and premiums on bonds payable accounted for?

If there was a discount on bonds payable, then the periodic entry is a debit to interest expense and a credit to discount on bonds payable; this has the effect of increasing the overall interest expense recorded by the issuer.

What is a bond discount and premium?

A premium bond has a coupon rate higher than the prevailing interest rate for that bond maturity and credit quality. A discount bond, in contrast, has a coupon rate lower than the prevailing interest rate for that bond maturity and credit quality. An example may clarify this distinction.

How do you report discounts on bonds payable?

Discount on Bonds Payable will always appear on the balance sheet with the account Bonds Payable. In other words, if the bond is a long-term liability, both Bonds Payable and Discount on Bonds Payable will be reported on the balance sheet as long-term liabilities.

Definition of Bond Issue Costs

The costs associated with issuing bonds are debited to a contra liability account such as Bond Issue Costs. Over the life of the bonds, the issue costs must be systematically moved from the balance sheet to the income statement. (Accountants refer to this as amortizing the costs.)

Example of Bond Issue Costs

Assume that a corporation incurs $24,000 of bond issue costs (legal and accounting fees) to register its recently issued bonds that will mature in 10 years. The corporation records these fees by debiting Bond Issue Costs for $24,000 and crediting Cash for $24,000.

Issuance of Bonds

Companies issue bonds to raise capital from the market. Bonds are typically issued when companies require funding for long-term projects.

Accounting for Issuance of Bonds

The valuation of bonds at the issuance date is the present value of future payments using an interest rate that reflects the risk category of the issued bonds.

Bonds Issued at Par

When bonds are issued at par, the coupon rate offered on the bond and the market interest rate will be the same.

Bonds issued at Premium

Suppose ABC company issues a bond at a par value of $ 100,000 and a coupon rate of 6% with 5 years maturity. The market interest rate is 5%.

Bonds Issued at Discount

Now let us suppose ABC company issues a bond at a par value of $ 100,000 and a coupon rate of 6% with 5 years maturity. The market interest rate is 7%.

What is commitment fee in IFRS 9?

To the extent there is evidence that it is probable that some or all of the facility will be drawn down, the commitment fee is allocated between the amounts that are expected to be drawn down and the amounts that are not expected to be drawn down. The fee related to the portion expected to be drawn down is accounted for as a transaction cost under IFRS 9 (i.e., the fee is deferred and deducted from the carrying value of the financial liabilities when the draw down occurs). The fee related to the portion not expected to be drawn down is capitalized as a prepayment for liquidity services and amortized over the period of the facility.

When are transaction costs expensed?

Transaction costs are expensed immediately when the financial liability is carried at fair value, with changes recognized in profit and loss.

Is the balance sheet of US GAAP aligned to IFRS?

The balance sheet presentation of transaction costs for US GAAP is generally aligned to IFRS. However, there may still be differences in the accounting and presentation of commitment fees incurred to obtain lines of credit.

Is a commitment fee an asset?

The commitment fee incurred to obtain a line of credit represents the benefit of being able to access capital over the contractual term, and therefore, meets the definition of an asset. Reporting entities should subsequently amortize the asset ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit. Only in the limited circumstances when a reporting entity draws down on a line of credit and does not intend to repay the borrowing until the contractual maturity of the arrangement (i.e., the borrowing is treated like a term loan) do we believe the portion of the costs related to each respective draw down could be presented as a direct deduction from the carrying value of the debt when drawn.

What is ASU 2015-03?

The US Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2015-03, “Sim­pli­fy­ing the Pre­sen­ta­tion of Debt Issuance Costs”, as part of its sim­pli­fi­ca­tion ini­tia­tive. The ASU changes the pre­sen­ta­tion of debt issuance costs in financial state­ments.

Is issue cost a direct deduction?

The ASU specifies that “issue costs shall be reported in the balance sheet as a direct deduction from the face amount of the note” and that “ [a]mor­ti­za­tion of debt issue costs shall also be reported as interest expense.” According to the ASU’s Basis for Con­clu­sions, debt issuance costs incurred before the as­so­ci­ated funding is received (i.e., the debt liability) should be reported on the balance sheet as deferred charges until that debt liability amount is recorded.

Issuance of Bonds

Accounting For Issuance of Bonds

Bonds Issued at Par

Bonds Issued at Premium

• Suppose ABC company issues a bond at a par value of $ 100,000 and a coupon rate of 6% with 5 years maturity. The market interest rate is 5%. Let us calculate the PV of bond principal payment and interest component first. PV of bond = $ 100,000 × (0.78355) = $ 78,355 PV Factor 5%, 5 years = 0.78355 Coupon Payments = $ 100,000 × 6% = $ 6,000 FV of Co...

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Bonds Issued at Discount