Liabilities > Bonds & Debt

Question 1

Under IFRS, how do bond issuance costs affect the carrying value of the bond liability?

Answer 1

Under IFRS and GAAP, bond issuance costs reduce the cash received from the bond issuance and are deducted from the carrying value of the liability.

The bond issuance is recorded as follows:
DR: Cash
DR/CR: Discount/Premium
CR: Bond Liability

Question 2

When do you use the stated rate and when do you use the market rate in calculating the Sales Price of a Bond?

In the amortization table, to calculate interest expense, do you use the stated rate or market rate?

Answer 2

Use the Stated Rate to determine the Semi-annual coupon payments.

Use the market rate for the PV Factors Table

You multiple the market rate by the CV of the bond to determine the interest expense in the period.

Question 3

How are debt modifications handled?

Answer 3

Debt modifications are normally handled prospectively, but not when the future cash outflows are less than the carrying value of the debt.

In which case, you book a gain in current operations and reduce the carrying value of the liability.