6. Non-current Liabilities

Question 1

How might a company borrow money?

Answer 1

A company may borrow directly from a bank or it may borrow in the form of debt securities (loan stock, debenture loan or bonds).

Question 2

What are debt securities?

Answer 2

The securities are normally issued as certificates, each with a par value, in return for cash (the loan principal). The certificate’s owner is legally entitled to interest on its par value, and is entitled to repayment of the principal ‘at maturity’, i.e., when the loan period reaches its end at a specifiable future date. This is known as redemption.

Question 3

How do debt securities affect the financial statements?

Answer 3

The company has a contractual obligation to pay interest on debt securities.

Interest due for the period will be included as a finance cost within the statement of profit or loss and any unpaid interest at the year end must be included in the statement of financial position within accruals and other payables.

Debt securities are similar in concept to any other type of loan. Unless they are due to reach maturity within 12 months, they are included in non-current liabilities in the statement of financial position. Any amount due for redemption within 12 months is shown under current liabilities.

Question 4

What is the accounting treatment (journal entry) for non-current liabilities on issue of debt?

Answer 4

On issue of debt:

Debit - Cash
Credit - Non-current liabilities

Question 5

What is the accounting treatment (journal entry) for non-current liabilities on repayment of debt?

Answer 5

On repayment of debt:

Debit - Non-current liabilities
Credit - Cash