Module 28.3: Issuance Cost, Derecognition, and Disclosures Flashcards
Under IFRS and GAAP, are issuance costs reduced from the proceeds?
Yes, liability on balance sheet is reduced by issuance costs, increasing the bond’s effective interest rate.
What does an increase or decrease in the bonds yield due to the fair value of the bond liability?
Increase will decrease the fair value of the bond liability and vice versa.
Under IFRS and GAAP can you report debt at fair value? Is the option irrevocable? How is the change in debt fair value reported?
Yes, firms are given the one time irrevocable option to record debt at FMV. If they elect to do so, changes in bonds’ market yields are reported on the income statement.
What occurs when the bond liability decreases on balance sheet to debt-to-assets and debt-to-equity ratios?
market debt to fair value and decreasing the liability will increase both these ratios.
When bonds are redeemed before maturity, what is recorded on the financial statements? how is it calculated?
a gain or loss on the income statement is recognized by subtracting the redemption price from the book value of the bond liability at the reacquisition date.
For example, carry value is 995,000 and a firm redeems debt of 1,000,000 at 102%, a loss of 25,000 would be recorded.
What are three examples of affirmative debt covenants?
1) Make timely interest payments
2) maintain certain ratios
3) maintain collateral, if any, in working order
What are three examples of negative covenants?
1) Increasing dividends or repurchasing shares
2) issuing more debt
3) engaging in mergers and acquisitions
Explain the seven disclosures that usually accompany long term debt
1) the nature of the liabilities
2) maturity dates
3) stated and effective interest rates
4) call provisions and conversion privleges
5) restrictions imposed by creditors
6) assets pledged as security
7) the amount of debt maturing in each of the next five years.
