CHAPTER-5-BONDS-PAYABLE.pptx

Its all about the accounting that specializes the liabilities

1. Chapter 5: Bonds Payable & Other Concepts

2. Bonds payable Bonds are long-term debt instruments similar to term loans and notes except that they are usually offered to the public and sold to many investors . Bond indenture is the contractual arrangement between the issuer and the bondholders. It contains restrictive covenants intended to prevent the issuer from taking actions contrary to the interests of the bondholders.

3. Types of bonds As to maturity Term bonds – bonds that mature on a single date . 2. Serial bonds – bonds that have series of maturity dates. These bonds are payable in installments. 3. Extendible and Retractable bonds – bonds that have more than one maturity date permitting investors to choose the maturity dates that meet their needs. a. Extendible bonds – bonds that give holders the right to extend the initial maturity to a longer maturity date. b. Retractable bonds – bonds that give holders the right to advance the return of principal to an earlier date than the original maturity.

4. Types of bonds (continuation) As to recording point of view and payment of interests 4. Registered bonds – bonds issued in the name of the holder (owner). Interests are paid directly to the holder. When the holder sells registered bonds, the bond certificate must be surrendered and a new certificate is issued . 5. Coupon (bearer) bonds – bonds that can be freely transferred and have a detachable coupon for each interest payment . 6. Zero-coupon bonds (strip bonds or deep-discount bonds) – bonds that do not pay periodic interests. Principal and compounded interests are due only at maturity date.

5. Types of bonds (continuation) 7. Income bonds – bonds that pay interest only if the issuer earns profits. 8. Participating bonds – bonds that participate in excess earnings of the issuer as defined in the indenture . 9. Indexed bonds (purchasing power bonds) – bonds that pay interest that is indexed to a measure of general purchasing power. 10. Inflation-linked bonds (Treasury Inflation Protected Securities ‘TIPS’) – bonds that provide protection against inflation in that the principal is increased by the change in inflation over a period.

6. Types of bonds (continuation) As to security and risk 11. Mortgage bonds – bonds secured by real property. 12. Collateral trust bonds – bonds secured by the issuer’s financial assets or the issuer’s own equity instruments which are deposited and held by a trustee for the bondholders. 13. Asset-backed securities – bonds based on underlying pools of assets. 14. Subordinated bonds (subordinated debentures) – bonds that normally have a higher yield than secured bonds. They are subordinated (inferior) to the claims of other general creditors, secured parties, and parties with priorities in bankruptcy.

7. Types of bonds (continuation) 15. Debenture bonds – long-term bonds not secured by specific property. 16. Junk bonds – bonds that are very high-risk, high-yield securities issued to finance leveraged buyouts and mergers. They are issued by troubled companies.   As to right of redemption 17. Callable bonds – bonds that contain call provisions giving the issuer thereof the right to redeem the bonds prior to their maturity date. 18. Convertible bonds – bonds that give the holder thereof the option of exchanging the bonds for shares of stocks of the issuer.

8. Types of bonds (continuation) As to issuer 19. Corporate bonds – bonds issued by private companies. 20. Government Bonds – bonds issued by a government and backed by its full faith and credit. As to currency 21. International bonds – ( a) Foreign bonds – bonds denominated in the currency of the nation in which they are sold. ( b) Euro bonds – bonds denominated in a currency other than that of the nation where they are sold.

9. Types of bonds (continuation) 22. Foreign currency bonds - – bonds issued by a foreign entity in a domestic market. Foreign bonds are denominated in the domestic market’s currency and are regulated by the domestic market authorities . Examples of foreign bonds: Samurai bonds – yen-denominated bonds issued in Japan by a foreign entity. Kangaroo bonds or Matilda bonds – Australian dollar-denominated bonds issued in Australia by a foreign entity. Maple bonds – Canadian dollar-denominated bonds issued in Canada by a foreign entity. Matador bonds – Euro-denominated bonds (Spain’s currency is Euro) issued in Spain by a foreign entity. Bulldog bonds – British pound-denominated bonds issued in the British market by a foreign entity. Yankee bonds – US dollar-denominated bonds issued in the US market by a foreign entity.

10. Accounting for bonds Bonds are accounted for in much the same way as notes and loans payable. However, bonds normally are long-term, bear interest, issued at a premium or discount, and entail transaction (issue) costs.

11. Bond premium and discount

12. Accounting for transaction costs Transaction costs on the issuance of bonds ( bond issue costs ) are included in the carrying amount of the bonds and amortized using the effective interest method . Transaction costs are deducted when determining the carrying amount of the bonds payable.

13. Issuance of bonds in between interest dates When bonds are issued in between interest dates, any accrued interest prior to the issuance date is sold to the investor together with the bonds . Any accrued interest charged to an investor should not be included in the carrying amount of the bond but rather credited to interest expense or interest payable . Moreover , the net interest expense recognized during the period should represent only the post-issuance interest expense .

14. Issue price of bonds The issuer may want to estimate the issue price of a bond under a specified current market rate. The estimated issue price is simply computed as the present value of the future cash flows of the bonds discounted at a specified effective interest rate.

15. Treasury bonds Treasury bonds are an entity’s own bonds which were originally issued but subsequently reacquired but not cancelled. Treasury bonds are presented in the financial statements as a deduction from bonds payable issued to arrive at the carrying amount of bonds payable outstanding.

16. Bond refunding Bond refunding refers to the issuance of new bonds (normally with lower interest rate), the proceeds from which is used to retire existing outstanding bonds.   Bond refunding is treated as an extinguishment of the outstanding bonds.

17. Retirement of bonds prior to maturity Retirement of bonds, whether prior to maturity or at maturity and whether through refunding or nonrefunding , is treated as extinguishment of liability. The carrying amount of the bonds is updated for any discount or premium amortization up to the date of extinguishment and any difference between the updated carrying amount and the reacquisition price is recognized in profit or loss as gain or loss from extinguishment .

18. Compound financial instruments A compound financial instrument is a financial instrument that, from the issuer’s perspective, contains both a liability and an equity element . These elements are classified and accounted for separately .

19. Accounting for compound financial instruments

20. Reclassification An entity shall not reclassify any financial liability.

21. Derecognition of a financial liability An entity shall remove a financial liability (or a part of a financial liability) from its statement of financial position when it is extinguished such as when the obligation specified in the contract is discharged or cancelled or expires.

22. Transfer of noncash assets (Asset swap) When an obligation is settled by transferring noncash assets to the creditor, the difference between the carrying amount of the liability extinguished and the carrying amount of the noncash asset transferred is recognized in profit or loss .

23. Transfer of equity securities (Equity swap) The difference between the carrying amount of the financial liability extinguished and the consideration paid (i.e., fair value of equity instrument or fair value of financial liability extinguished, whichever is more clearly determinable) is recognized in profit or loss .

24. Modification of terms A substantial modification of the terms of an existing financial liability ( whether or not attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the present value of the cash flows under the new terms, discounted using the original effective interest rate , is at least 10 % different from the carrying amount of the original financial liability.

25. Offsetting a financial asset and a financial liability An entity shall offset a financial asset and a financial liability and the net amount presented in the statement of financial position only when the entity currently has a legally enforceable right to set off the recognized amounts; AND intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.