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Related Standards Specify, among other things the ff: TYPES OF BONDS
PAS 32 Financial Instruments: Presentation 1. Rights and Duties of bondholders and issuer As to Maturity
PAS 7 Financial Instruments: Disclosures  Call Provision- issuer’s right to call the bonds
PFRS 9 Financial Instruments 1. Term Bonds- mature on a single date
before maturity (e.g. when interest declines)
What are BONDS?  Redemption rights- the holder’s rights to redeem 2. Serial Bonds- principal matures in installments
 Bonds are long-term debt instruments similar to the bonds before maturity
notes and loans 3. Extendible and Retractable bonds
How does it differ from the two? 2. Restrictions and requirements on the issuer - have more than one maturity date
Bonds are usually offered to the public and sold to - Which may include
many investors  Sinking Fund Extendible bonds- it gives the holder the right to extend
How?  Financial Ratios the maturity to a later date
 It is broken up into various subunits (e.g. P1000  Restriction on dividends available to the issuer’s Retractable bonds- give holders the right tp shorten the
each) shareholders initial maturity date
DEBT INSTRUMENT  Restriction on the incurrence of additional
 Is any contract that represents right upon the obligations- restriction of the Retained Earnings As to Recording point of view and payment of interest
holder to receive cash from the issuer thereof.  Appointment of independent trustee- 1. Registered Bonds
qualifications are stated in the bond indenture - issued in the name of the holder (interest are paid
Examples:  Authorized amount- of bonds that can be issued directly to the holder)
Accounts payable
Notes Payable 3. Interest rate, payment date(s) and maturity date(s) - When the holder sells the bond to another, the
Loans Bond Certificate certificate must be surrendered and a new
Bonds  Is issued to the bondholder representing the certificate is issued
Redeemable Preference shares issued amount he has purchased
2. Coupon (bearer) bonds
Denominations of bonds
BOND INDENTURE  Bonds are normally issued in denominations such - can be freely transferred
 Is the contractual arrangement between the as P1000 and P10,000. - Detachable coupon
issuer of the bonds and the bondholders  It increases the affordability of bonds
 It contains restrictive covenants intended to 3. Zero-coupon bonds (strip bonds or deep-discount bonds)
prevent the issuer from taking actions contrary to ISSUANCE OF BONDS - do not pay periodic interest but sold at a deep
the interests of the bondholders  Maybe issued through discount
 A trustee, often a bank is appointed to ensure 1. An Underwriter- agrees on the price of the bond, pays 4. Income bonds
compliance the issuer and resells the bonds at a higher price - pay interest only if the issuer earns profit
2. Auction 5. Participating bonds
3. Direct Placement

- Bonds that participate in excess earnings of the B. Foreign Bonds

issuer as defined in the indenture – bonds denominated in currency of the domestic “There is no premium or discount when bonds are issued at
market in which they are offered- usually given face amount (except when transaction costs are
6. Indexed Bonds (purchasing power bonds) nicknames that refer to the domestic market incurred)“
– pays interest that is indexed to measure general 1. Kangaroo bonds or Matilda Bonds – Australian Thus “EFF% = Nom%”
purchasing power -------------dollar denominated bonds issued in Australia by BOND ISSUED AT A DISCOUNT
a foreign entity  When issue price < FA, so EFF% > Nom%
As to security and risk 2. Maple Bonds – Canadian-dollar denominated --- #Why?
1. Mortgage bonds- secured by real property ---------- bonds When Eff% is higher it means the cash flows are
2. Collateral trust bonds – secured by 3. Matador Bonds – Euro – denominated bonds discounted at a rate higher than how much it
issuer’s --------------securities held (of-Spain) grows (Nom%), which would lower its CA.
by a trustee 4. Bulldog Bonds- British pond denominated “Discount on bonds payable” – has a normal debit balance
3. Asset-backed bonds (securities)- collateralized - 5. Yankee bonds- US- dollar-denominated and is a contra account.
--------------by a pool of assets C. Global Bonds #PRESENTATION IN THE FS (from lecture)
4. Subordinated Bonds (subordinated ---------------- - Bonds issued in several countries at the same Face Amount
---------- debentures)- bonds that have a higher yield ----- time (Discount)
-------- than secured bonds but a lower priority Carrying Amount
during -------------liquidation ACCOUNTING FOR BONDS
5. Debenture Bonds- unsecured by any collateral  Bonds are accounted for in much same way as Amortization Table
6. Junk Bonds – high risk, high-yield bond typically notes and loans Interest Interest Present
-------------issued to finance leverage buyouts and mergers Difference between actg. Bonds and actg. the two are Date Amortization
Payments Expense Value
As to the right of redemption caused by Bonds being normally ; Notice!! (in the book p. 105 of Intermed 2 by Millan)
1. Callable Bonds- 1. Long-term  Amortization of the discount will increase the
2. Convertible Bonds 2. Bear Interest periodic interest expense
As to Issuer 3. Issued at a premium or discount #Story of a Discount
1. Corporate Bonds 4. Entail Transaction (issue) cost When bonds are issued at a discount, the cash received is
2. Government bonds (Treasury bonds) < the obligation incurred; so what does that mean?
1. International bonds - bonds issued by a foreign ---------- Cash Proceeds ( EFF% vs. Effect of
Carrying Amount) Nominal % Amortization
It is not recognized immediately but rather deferred and
---entity in a domestic market amortized as an addition to periodic interest expense.
compared to Face Interest Exp.
Amount #Huh? I don’t get it. Loss but deferred and added to
A. Eurobonds- bonds denominated in a currency other DISCOUNT CA < FA EFF% > Int Exp. > Int. Paid interest expense?
than the currency of the market in which they are offered. Nom% It means every year, interest expense is added
PREMIUM CA > FA EFF% < Int Exp. < Int. Paid
with the amount of the amortization of that loss.

So how does that addition to the periodic interest expense Periodic payment of interest BONDS ISSUED AT A DISCOUNT- WITH TRANSACTION
constitutes a loss? Interest Expense XX COST
Duh, it’s an expense, my Dear Shanelle. : V. Premium on BP XX
What is an expense? to be deducted to the gross Cash XX = Discounted BP- Transaction Cost
What is a loss? – shall also be deducted to the ACCOUNTING FOR TRANSACTION COSTS JOURNAL ENTRY 1ST METHOD
income to arrive at the net income Financial Liabilities Cash (FA-Discount-TC) XX
 Initially measured at FV - transaction costs Discount on BP XX
UNAMORTIZED BALANCE OF A DISCOUNT OR PREMIUM Similarly, transaction costs when issuing bonds (bond Bonds Payable XX
issue cost) ARE DEDUCTED to arrive at the carrying
Face Amount amount of the bonds “The bonds issue costs are included on discount on bonds
Less: Carrying Amount (at that date) payable”
Discount on bond payable- at a certain date “Transaction costs may require an adjustment to the
EFF%” Subsequent Period:
 When issue price > obligation incurred JOURNAL ENTRY Cash XX
 EFF% < Nom% Discount on BP XX
“Whether bonds are issued at a discount or at a premium, Cash XX
the *Bonds Payable* account is always credited at FA Bond issue cost XX
Cash XX
 Notice that the amortization of premium
decreases the periodic interest expense.  Transaction costs are recorded separately and will Bond Issue cost XX
 The cash proceeds received are more than the
be subsequently amortized using the Effective Bonds Payable XX
Face amount. In effect, there is a gain Interest Method
 Gain is not recognized immediately but deferred
Subsequent period:
and amortized as a reduction to periodic interest SUBSEQUENT MEASUREMENT Interest Expense XX
Cash XX
Interest Expense XX Bond Issue cost XX
Bond Issue Cost XX Discount on BP XX
Cash XX
Cash XX
Bonds Payable XX
#Solve the amount using #Fractioning
Premium on BP XX
*insert equation here later

EFFECTIVE INTEREST METHOD “Whether the interest expense or interest payable is Issue Price 1/1/x1
“PFRS 9 requires the use of the effective interest method credited, the total interest expense in that year is limited to Premium Amortization up to 4/1/x1
in amortizing discounts or premiums on financial the post-issuance interest expense” + Accrued interest sold
instruments” Issue Price at April 1, 20x1
When Interest Expense was credited
ISSUANCE OF BONDS BETWEEN INTEREST PAYMENT SUBSEQUENT JOURNAL ENTRY #* the accrued interest sold means the interest that could
DATES Interest Expense 120K have been incurred if the bonds were issued at Jan 1. So
Cash 120K since the bonds were issued at April [(Interest Expense for
Treatment of Accrued Interest prior to the issuance date a year) * (3/12)]
 Not included in the initial measurement of the
bond Total interest expense in 20x1: “HOWEVER, since the bonds are issued between interest
 But rather credited to Interest payable or Interest 120,000 payment dates, the total proceeds from the issuance will
Expense (30,000) necessarily include the accrued interest sold”
 represents only the post-issuance interest expense When ‘Interest Payable’ was initially credited - refers to the issuance of new bonds, the
(int. exp. after issuance date) proceeds from which are used to retire
 Pre-issuance interest is not recognized as interest SUBSEQUENT JOURNAL ENTRY existing bonds
expense Interest Expense 90K - usually, the new bonds have lower
“The initial carrying amount of the bonds is equal to the Interest Payable 30K interest rate than the replaced bonds
cash proceeds excluding the accrued interest” Cash 120K RETIREMEN OF BONDS PRIOR TO MATURITY

Example: On April 1, 20x1, ABC co. issued 12% P1000,000 ISSUE PRICE OF BONDS Retirement Price
bonds dated Jan 1, 20x1. The bonds were issued a 97 = Present value of future cash flows - Carrying Amount (update with its amort.
including accrued interest #It is easy to solve when the bonds were issued on Jan 1 Gain or Loss in P/L
but if they were issued between interest payment dates
JOURNAL ENTRY #How then do we find/solve for its issue price? #The direct cost upon retirement is included as part of the
Cash 970,000 Loss
Discount on BP 60,000 (Refer to p.118 of Intermediate Actg. 2 Millan)
Bonds Payable 1000,000 #The Present value of the bonds at Jan1 20x1 shall be JOURNAL ENTRY
Interest Payable/ Expense 30,000 solved first and then, multiply it with the EFF%, then by Bonds Payable –old XX
(3/12) to arrive at its amortization for the 3 months that Loss on extinguishment of bonds XX
has passed (bond issuance at April 1,20x1). Discount on BP XX
Cash XX

#Remember that for the interest rate (i) to be used in the “Alternatively, we can modify the amortization table to
Face Amount of Bonds equation, it should be interest rate of the bonds not the include columns for ‘interest payable’, ‘amortization’ and
- Unamortized Discount EFF% ‘present value’ pertaining only to the bonds”
Carrying Amount of Bonds as at that retirement date - refer to p. 124 of Intermediate Actg. 2 Millan
PMT { ( )
- the issuer can redeem prior to maturity date
Face Amount of Bonds #Because the interest that will be paid at maturity will - when measuring at amortized cost, the issuer
- Call Premium have grown (compounded) based on the interest rate of should estimate its expected holding period
Retirement/ Call Price the bonds, and not the EFF% (which may be shorter than the original maturity
- are bonds in which the principal matures in - is one which the holder has the right to return
instalments Principal (put back) to the issuer- Cash or; another Financial Asset
PERIODIC PAYMENT + FVA of Interest or is automatically put back to the issuer upon the
- consist of payments for both interest and ( ) occurrence of a specified future event (e.g. holder’s death)
The interest payments shall be based upon the JOURNAL ENTRY - this instrument includes a contractual obligation
Cash XX of the issuer to redeem or repurchase the instrument.
Outstanding Principal Balance Discount on BP XX
Principal Bonds Payable XX CLASSIFICATION
- Principal Payments - is a financial liability EXCEPT when the
Outstanding Principal Balance AMORTIZATION instrument also represents the residual interest in the net
assets of the issuing entity (in which case, it’s classified as
ZERO-COUPON BONDS Interest Discount on Present Value equity instrument)
- do not pay periodic interest Date Bonds
PAYMENT Expense Payable of Cash Flow EXAMPLES
- both principal and compounded interests are due a= b*18% b= previous bal.+ a 1. Extendible and retractable bonds
only at maturity 1/1/x1 2,430,263.00 2. Preference shares with mandatory redemption
#HOW TO SOLVE? (Redeemable Preference shares )
12/31/x1 437,447.34 2,867,710.34
Since the interest will be paid only at maturity.
12/31/x2 516,187.86 IGNORED 3,383,898.20
1. FVA the interest (Example. for 10% 3M bonds- find the AMORTIZATION TABLE ( Problem P.125 IA Millan)
Future value of Annuity of 300K for N periods) 12/31/x3 609,101.68 3,993,000
# IDK why amortization for Preference shares is done like
this (see figure 2.)

*Observe that the dividends are recognized as interest expense and Two instruments in the issuance of a Convertible Bond
Interest Interest Present Value charged to profit or loss 1. debt instrument
Date Amortization
Payment Expense of Cash Flow - for the bonds payable
a= b*18% b= previous bal.+ a Case 2. The preference shares are redeemed at a 2. Equity instrument
1/1/x1 862,609.00 premium of 100K on 12/31/x5 - for the equity conversion feature
12/31/x1 51,756.54 25,878.27 25,878.27 888,487.27 PRESENTATION
12/31/x2 53,309.24 26,654.62 26,654.62 915,141.89 JOURNAL ENTRY - these components shall be presented separately
12/31/X5 Redeemable Pref. Shares 1M
12/31/x3 54,908.51 27,454.26 27,454.26 942,596.14 Loss on redemption of PF 100K
in the Financial Position
12/31/x4 56,555.77 28,277.88 28,277.88 970,874.03 Cash 1.1M FORMULA
12/31/x5 58,252.44 29,126.22 29,126.22 1,000,000 Carrying Amt. allocated to the Liability component
Figure 1: I thought this is how it should be done - Carrying Amt. allocated to the Equity component
Case 3. The preference shares are redeemed at a FV of the Whole Instrument
Interest Discont Present Value premium of 100K on 12/21/x3
Expense Amortization of Cash Flow
b= previous bal.+ a
JOURNAL ENTRY NO gain or loss in the initial recognition of the
12/31/X5 Redeemable Pref. Shares 1M components
1/1/x1 137,391 862,609.00 Loss on redemption of PF 157,404
Discount on RPF 57,404
“The separate classifications of the components are not
12/31/x1 25,878.27 111,512.98 888,487.27
Cash 1.1M revised for the subsequent changes in the likelihood that
12/31/x2 26,654.62 84,858.36 915,141.89 the conversion option will be exercised”
12/31/x3 27,454.26 57,404.11 942,596.14 “Extendible and retractable bonds are accounted for
12/31/x4 28,277.88 29,126.22 970,874.03 similar to redeemable preference shares” Illustration (Refer to p. 128)
12/31/x5 29,126.22 - 1,000,000 Issue Price
Figure 2: Millan’s version p. 126 COMPOUND FINANCIAL INSTRUMENTS - FV of debt instrument w/o equity feature
- From the issuer’s perspective, contains both a Equity Component
JOURNAL ENTRY liability and an equity component
12/31/X1 Interest Expense 25,878 Phrases that mean the FV is w/o the equity feature
Discount on BP 25,878 CLASSIFICATION - “bonds were selling at __ w/o the conversion
- These components are classified and accounted option”
Case1. The company declares dividends on March for separately.
EXAMPLE - “are also allocated to the liability and equity
JOURNAL ENTRY 1. Convertible bonds- are bonds that can be components in proportion to the allocated issue
3/31/X2 Interest Expense 60,000 converted into shares of stocks of the issuer. price”
Cash 60,000


Allocation of Issue Price - NO gain or loss is recognized on the conversion - When only some, but not all, of the bonds are
( Allocation of Transaction Cost) - SHARE ISSUANCE COSTS converted
Equity Component - are treated as reduction to share premium - only the portion of the bonds that were
converted is derecognized.
Simple entries - is closed to the “share premium” general account Share Premium- conversion feature
1/1/X1 Cash 1M because all the conversion privilege has been exercised. - only the portion of this pertaining to the
Discount on BP 20K
converted bonds is transferred within the equity
Bonds Payable 1M
Share Premium 20K #What is really is SHARE PREMIUM- CONVERSION
FEATURE Conversion between interest payment dates
1/1/X1 Discount on BP 49K Before Conversion - the accrued interest is usually settled separately
Share Premium 1K in cash.
Cash 50K
- is part of the share premium but describes as
pertaining to the conversion feature. - Thus only the carrying amount of the bonds is
*the transaction cost allocated to the equity component is deducted accounted for when applying the equity set-off
from share premium while that of the debt component is included in When the conversion is exercised method.
the discount on bonds payable to simplify the subsequent recording of - such amount is reclassified within equity (from RETIREMENT
one share premium account to another share
premium account) Total retirement price
Compound Entry Effect on Equity – the conversion increased equity - Retirement allocated to the bonds
1/1/X1 Cash (1M-50K) 950K by the carrying amount of the bonds on the Retirement Price allocated to the equity component
Discount on BP 69K conversion date less the transaction costs incurred
Bonds Payable 1M
on conversion *The retirement price allocated to the bonds is equal to the
Share Premium 19K
fair value of the bonds without the equity feature as of the
CONVERSION (p.131) Carrying Amt. of the bonds on date of conversion retirement date
Equity Set-Off - Conversion Cost
Net Increase in Equity Gain or Loss at retirement
- the carrying amount of the bonds is simply
derecognized, the aggregate par value of the shares issued Retirement price allocated to the bonds
is credited to “Share capital” and the difference is credited Or
Increase in Share Capital - Carrying Amt. of the bonds on date of retirement
to “Share Premium” Gain/Loss on extinguishment of the bonds
FA of Bonds Payable - Net Increase in “Share Premium”
Share Capital Net Increase in Equity
- Remaining Discount -
Share Premium

Simple Entries (problem p. 134) Other Scenario: Issue Price

12/31/X2 Bonds Payable 1M Partial retirement: - FV od Debt instrument ex-warrants
Loss on extinguishment of bonds 8,848 Bonds: only a portion of this is retired, only that Equity Component
Discount on bonds payable 17,857
Cash (amt allocated to bonds) 990,991 portion is derecognized
#just same equation for the determination of equity component
Gain/Loss: this is computed only on that portion
for the convertible bonds
12/31/x2 Share Premium- conversion feature 9,009 SP- conversion feature:- only a portion of this is
Cash (amt. allocated to equity) 9,009 transferred within the equity JOURNAL ENTRY (Problem p. 136)
12/31/x2 Share Premium- conversion feature 139,028 Initial Measurement
Cash (amt. allocated to equity) 139,028
o to improve salability, bonds are sometimes issued 1/1/x1 Cash 970K
Compound Entry with share warrants Discount on BP 50K
12/31/x2 Bonds Payable 1M Share Warrant Bonds Payable 1M
SP - conversion feature 148,037 - entitles the holder to purchase shares of stocks Share Premium-warrants outstanding 20K
Loss on extinguishment of bonds 8.848 of the issuer at a fixed price.
Cash 1M Life Exercise of Warrants
Share Premium 139,028 o Generally: 5 years Cash 600K
Discount on BP 17,857 o Occasionally: 10 years SP- WO 10K
o Very Occasionally : perpetual Share Capital 500K
Detachable or Non-Detachable
o Detachable share warrant- share warrant that can
Expiration of Warrants
Equity component allocated from the issue price be detached (separated) from the bond and
- Equity component allocated from the retirement price traded as a separate security
-the remaining half of the warrants expired
Amount permanently closed to share premium account o Non-detachable share warrant – cannot be sold
separately from the bond
Share Premium- WO 10K
“The equity component is closed to the ‘share
Share Premium 10K
premium’ general account because the conversion feature COMPOUND FINANCIAL INSTRUMENTS
is forfeited by the retirement of the bonds” - bonds issued with share warrants whether
detachable or not, are compound financial
- PFRS 9 prohibits the reclassification of financial
Equity Component remains in equity whether the instruments
conversion feature is exercised or not. However it is
reduced by any allocated retirement price.
- It is accounted for similar to convertible bonds - A financial liability is derecognized when it is
- However, unlike convertible bonds, the exercise extinguished.
of share warrants does not extinguish the bonds

Example: What is used? FV of securities issued or FV of financial WHY ORIGINAL EFF% IS USED AND NOT THE CURRENT
o when the obligation is discharged liabilities extinguished? RATE?
o Cancelled or; - whichever is more clearly determinable - Because the liability is measured at amortized
o Expires cost and using the current rate would change the
How is a liability extinguished? GAIN/ LOSS in using the FV of Liab. – refer to P. 139 measurement to fair value
o Repayment of Cash Journal Entry for this prob. using the FV of financial
o Transfer of non-cash assets or rendering of liability when the FV of shares is not reliably determinable What to do Next?
services If Substantial
o Issuance of equity securities Loan Payable 1M the original liability is derecognized and replaced with the
o Replacement of the existing obligation with a new Loss on extinguishment of debt 103,084 new one.
obligation Share Capital 500K
o Waiver or cancellation by the creditor Share Premium 603,084 Gain/Loss
o Expiration (e.g. warranty) Carrying Amount of Original Liability
- A borrower and lender may modify the terms of Gain/Loss in P/L
Carrying Amount of Liab. Extinguished an existing financial liability such as by Changing;
- Carrying Amount of the Noncash asset transferred If not Substantial (less than 10%)
Gain/Loss in P/L o the Stated interest rate - it is considered to be recognized but with
o maturity date modified cash flows depending on the modified
*Note that the fair value of the noncash asset transferred o face amount terms (the new liability is not recognized)
is ignored o Reducing, deferring or cancelling any accrued
interest Adjustment to EFF% - may be necessary
Gain: “If payment is less than the liability extinguished” Substantially Different Terms Gain or Loss- NO GAIN OR LOSS IS RECOGNIZED
Loss: “if payment is more than the liability being - existing financial liability is considered
extinguished” extinguished and replaced by a new one DIRECT COSTS OF MODIFICATION
– accounted for as follows
TRANSFER OF EQUITY SECURITIES When can we consider the change SUBSTANTIAL? A. If modification is substantial- included in the
- if PV of CFs under the new terms discounted at gain/loss
Carrying Amount of Liab. Extinguished ORIGINAL EFF%, is at least 10% different from the B. not substantial – deducted from the carrying
- FV of securities issued or FV of financial Liab. extinguished carrying amount of the original financial liability amount of the existing financial liability and
Gain/Loss in P/L subsequently amortized using the Effective
*IFRIC 19 interest method

IMPAIRMENT LOSS FO THE LENDER  is not accounted for as an extinguishment of a

- the debtor’s accounting for modification is financial liability
similar to the lender’s accounting for impairment OFFSETTING A FINANCIAL ASSET AND A FINANCIAL
loss, except that there is no ‘10%’ threshold for LIABILITY
the lender. - only the net amount is presented in the
statement of financial position when the entity has
Carrying Amount of Receivable both:
- PV of future CFs (recoverable amount) A. a legal right of setoff; and
Impairment Loss by Lender B. an intention to settle the amounts on a net basis or
-the creditor grants the debtor, who is undergoing
PAS 32- requires offsetting when doing so reflect the
financial difficulties, concession that would not
otherwise be granted in a normal business relationship.
entity’s expected future CFs from settling two or more
separate financial instruments.
What does this involve?
- easing or relaxing the terms of the debt in order to Offsetting is not appropriate for;
accommodate the debtor
Accounting (A) financial or ____ that are pledged as collateral for no-
- Accounted for as modification of financial recourse financial liabilities (the picture was cut here! ask
liability for a copy!)
(B) Sinking fund and the related financial liability for which
- if the creditor cancels a financial liab, the debtor
derecognizes the liability and recognizes gain

 An arrangement whereby a debtor purchases
securities and places them in an irrevocable trust.
 the principal and interest of the securities are
then used to pay-off a existing debt as it matures
 does not release the debtor from its obligation on
existing debt, which remains outstanding
 in some cases, the creditors are not even aware of
the transaction