BONDS PAYABLE
◦ Definition of bond
◦ Term and serial bonds
◦ Secured and unsecured bonds
◦ Registered and bearer bonds
◦ Other types of bonds
◦ Features of bond issue
◦ Contents of bond indenture
◦ Sale of bonds
◦ Initial measurement of bonds payable
◦ Subsequent measurement of bonds payable
◦ Amortized cost of bonds payable
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Accounting for issuance of bonds
Memorandum approach
Journal entry approach
Issuance of bonds at premium
Issuance of bonds at discount
Presentation of discount and premium
Bond issue cost
Recording interest on bonds
Issuance of bonds on interest dates
Issuance of bonds between interest dates
Another approach for the interest accrued
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Financial statement presentation
Bond retirement on maturity date
Bond retirement prior to maturity date
Query
Treasury bonds
Bond refunding
Amortization of bond discount or premium
Premature retirement of serial bonds
Fair value option of measuring bonds
payable
Change in fair value recognized in OCI
EFFECTIVE INTEREST METHOD
◦ Introduction
◦ Effective interest method
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Effective amortization of discount
Market price/issue price of bond payable
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Effective interest method – bond issue cost
COMPOUND FINANCIAL INTEREST
NOTE PAYABLE
DEBT RESTRUCTURE
LESSEE ACCOUNTING – Basic Principles
LESSEE ACCOUNTING – Other Accounting Issues
OPERATING LEASE – Lessor
DIRECT FINANCING LEASE – Lessor
SALES TYPE LEASE – Lessor
Bonds Payable
Definition of bond
Term and serial bonds
Secured and unsecured bonds
Registered and bearer bonds
Other types of bonds
Features of bond issue
Contents of bond indenture
Sale of bonds
Initial measurement of bonds payable
Subsequent measurement of bonds payable
Amortized cost of bonds payable
Accounting for issuance of bonds
Memorandum approach
Journal entry approach
Issuance of bonds at premium
Issuance of bonds at discount
Presentation of discount and premium
Bond issue cost
Recording interest on bonds
Issuance of bonds on interest dates
Issuance of bonds between interest dates
Another approach for the interest accrued
Financial statement presentation
Bond retirement on maturity date
Bond retirement prior to maturity date
Query
Treasury bonds
Bond refunding
Amortization of bond discount or premium
Premature retirement of serial bonds
Fair value option of measuring bonds payable
Change in fair value recognized in OCI
Gain on extinguishment of debt
900,000
Computation (USA GAAP)
• Two transactions take place: Sale of asset and extinguishment of liability
Fair value of land
2,200,000
Carrying amount of land
1,500,000
Gain on exchange
700,000
Effective Interest Method
Introduction
Effective interest method
Effective amortization of discount
Market price or issue price of bond payable
Effective interest method – bond issue cost
Total liability
Fair value of land
Gain on debt restructuring
2,400,000
2,200,000
200,000
Debt restructuring – creditor, for economic or legal reasons related to the
debtor’s financial difficulties, grants debtor concession (by agreement or
law) that would not otherwise be granted in a normal business relationship
Objective – for the creditor to make the best out of a bad situation
Journal Entry
Note payable
2,000,000
Accrued interest payable
400,000
Land
Gain on exchange
Gain on debt restructuring
1,500,000
700,000
200,000
Types of Debt Restructuring
1. Asset Swap
• transfer of asset by debtor to creditor
• derecognition of financial liability or extinguishment of obligation
Note: PFRS 9 shall be followed thus there is no gain or loss on exchange and
debt restructure
Debt Restructure
Illustration
Balance at year end:
Note payable
Accrued interest payable
Total liability
Dacion on Pago – when a mortgaged property is offered by debtor in full
payment of debt
2,000,000
400,000
2,400,000
At year end, entity transferred to creditor land:
Fair value
2,200,000
Carrying amount
1,500,000
Computation (PFRS)
Total liability
Carrying Amount – Land
Gain on extinguishment of debt
2,400,000
1,500,000
900,000
Journal Entry
Note payable
Accrued interest payable
Land
1,500,000
2,000,000
400,000
Illustration
Land costing 500,000 and building costing 4,000,000 with accumulated
depreciated of 800,000 were mortgaged to secure a bank loan with face
amount 3,000,000, accrued interest payable 200,000, and legal and bank
service charges of 50,000. Then, both were given to bank as payment of
entire liability
Computation
Total liability
Carrying amount of assets
Loss on extinguishment of debt
Journal Entry
Mortgage payable
3,000,000
Accrued interest payable
200,000
Bank service charges
50,000
Loss on extinguishment of debt 450,000
3,250,000
3,700,000
450,000
Accumulated depreciation
Land
Building
800,000
500,000
4,000,000
Equity Swap – issuance of share capital by debtor to creditor in full or
partial payment of an obligation
Accounting Issue
• The extinguishment of financial liability by issuing equity instruments is
well settled in IFRIC 19
• Order of priority (measurement of equity instruments issued):
a. Fair value of equity instruments issued
b. Fair value of liability extinguished
c. Carrying amount of liability extinguished
Illustration
Data at year-end:
Bonds payable
Accrued interest payable
Carrying amount of liability
Fair value
Issued equity instruments:
Par value
Fair value
a. Fair value of equity instruments issued
Computation
Fair value of shares issued
Par value
Share Premium
Carrying amount of liability
Fair value of shares issued
Gain on extinguishment of debt
Journal entry
Bonds payable
5,000,000
Accrued interest payable
500,000
Share Capital
Share Premium
Gain on extinguishment of debt
5,000,000
500,000
5,500,000
4,700,000
2,000,000
4,500,000
4,500,000
2,000,000
2,500,000
5,500,000
4,500,000
1,000,000
2,000,000
2,500,000
1,000,000
b. Fair value of bonds payable used
Computation
Fair value of shares issued
Par value
Share Premium
Carrying amount of liability
Fair value of shares issued
Gain on extinguishment of debt
Journal entry
Bonds payable
5,000,000
Accrued interest payable
500,000
Share Capital
Share Premium
Gain on extinguishment of debt
4,700,000
2,000,000
2,700,000
5,500,000
4,700,000
800,000
2,000,000
2,700,000
800,000
Lessee Accounting – Basic Principles
Lease (IFRS 16) is defined as a contract of part of a contract that conveys
the right to control use the underlying asset for a period of time in
exchange for consideration.
• Asset is typically identified by being explicitly identified in contract or
implicitly specified when made available to customers
Right to control the use of asset
a. Customer can obtain substantially all of the economic benefits from
exclusive use of asset
b. Direct use of asset such as when customer has the right to direct
how and for what the asset will be used
Finance lease model for lessee
• At commencement date, shall recognize a right of use asset for the right
to use the underlying asset over the lease term and a lease liability for the
obligation to make payments
• All leases shall be accounted for by the lessee as a finance lease
• Underlying asset – subject of lease
• Lessee – entity that obtains the right to use an underlying asset
• Lessor – entity that provides the right to use underlying asset
Operating lease model for lessee
• Lessee is permitted to make an accounting policy election to apply the
operating lease accounting and not recognize an asset and lease liability in
two optional exemptions:
a. Short-term lease
• Lease that has a term of 12 months or less at the commencement
date of the lease
• Election shall be made by class of underlying asset (grouping of
underlying asset of similar nature and use in firm’s operations
b. Low value lease
• New standard does not provide a quantitative threshold for low
value asset thus, it is a matter of professional judgment
• Lessee shall assess the value of underlying asset based on the
value when it is new
• Personal computers, office furniture and equipment
• Election is made on a lease by lease basis
Finance lease – Lessee
• Finance lease is a lease that transfers substantially all of the risks and
rewards incidental to ownership of an underlying asset
• All leases shall be accounted for by the lessee as a finance lease
• At the commencement date, lessee shall recognize a right of use asset and
lease liability
Initial measurement of right of use asset
• A right of use asset is an asset that represents the right of a lessee to use
an underlying asset over the lease term in a finance lease
• Lessee shall measure the right of use asset at cost at commencement
date. Cost shall include:
a. PV of lease payments or initial measurement of lease liability
b. Lease payments made to lessor at or before commencement date
e.g., lease bonus, lease incentives (payments by lessor to lessee
associated with a lease or the reimbursement or assumption by
lessor of the costs of lessee e.g., lessor agrees to reimburse lessee
for the commission paid by lessee to a broker; deducted from cost
of right of use asset)
c. Initial direct costs incurred by lessee
d. Estimate cost of dismantling, removing and restoring the underlying
asset
• Leasehold improvements are not included in the cost and separately
accounted for as PPE
• Security deposit refundable, upon lease expiration is an asset by lessee
Subsequent measurement of right of use asset
• Lessee shall measure the right of use asset applying the cost model and
adjusted for any remeasurement of the lease liability
Presentation of right of use asset
• Lessee shall present it as a separate line item in the statement of financial
position
• Lessee may include right of use asset in the appropriate line item within
which the underlying asset would be presented e.g., it may be included in
the PPE, but with disclosures