A Determine the initial recognition, initial measurement and subsequent measurement of bonds Flashcards
Bonds Issued at Par
yield = coupon rate; PV coupon payments + PV face amount is = par
Par issues effects on financial statements
BS - A’s and L’s + by FV…the BV of the bond L will not change over the term of the bond.
IS - Interest expense for the period is equal to the coupon payment because the yield at issuance and the coupon rate are the same.
CF - FV is a cash inf from fin. activs, coupon payment is cash outfl from op. actv (IFRS may report as CFF or CFO). at maturity, repayment of the FV is reported as a CoutflowFF
Bonds Issued at a discount or Premium
*Proceeds received (are equal to the PV of the coupon payments + PV of the face value) are not equal to par value if the bonds yield issuance is not equal to the coupon rate.
Bonds yield issuance not = coupon rate means price is discounted(FV market)
If coupon rate is less than bonds yield, the proceeds received will be less than the FV; discount rate - the coupon rate is lower than the coupon rate that would make the market price of the bond equal to its par value. Investors will pay less than FV because of the lower coupon rate. - discount bonds
IF the coupon rate is > bonds yield, the bond price and the proceeds received will be greater than the face value; premium bonds, investors pay more for the above-market coupon payments.
Balance Sheet Measurement
Note: Interest expense and the book value of a bond liability are calculated using the bonds yield at the time it was issued, not its yield today - CRITICAL!
At issue, A and L will inc. by the bonds proceeds. At some point BV of the faceV will = the PV of the remaining future CF’s (coupon payments and FV) discounted at the bonds yield at issuance.
Premium on BS - reported on BS at more than its FV. Amortize premium BV to faceV of the bond at maturity
Discount Bond - reported on BS @ < FV. Amortize discount BV of the bond liability until it reaches FV at maturity.
