bond issuance cost

CFA Level I FRA
#1

Hello all,

I am confused about recognizing de issuance cost of a bond under IFRS. I understand that we have to subtract the costs to the cash obtained and record the difference as an expense on the IS. However, I don’t see how we can record a liability for an amount different than that we owe. In my opinion, the liability should be recorded equal to the face value of the issue (assuming no discount or premium).

So:

Cash = face value – issuance cost

Expense in IS = issuance cost

Liability = Face value

Is my assumption correct?

Please let me know your thoughts on this.

E.

#2

You’re correct.

#3

The borrower bears the issuance cost from the amount of cash lent?

#4

Yup.

#5

thanks a lot as always, magician.

#6

My pleasure.

#7

Isn’t the original recognition for IFRS like this:

Dr. Cash XXX

Cr. Bonds payable XXX

where XXX = market value (not face value!) - issuance costs

At initial recognition, there will be no reduction in the income statement. However, the issuance costs will be amortized and recorded in the income statement over the tenor of the bond.

For US GAAP, the issuance costs will be recorded as deferred financing charge in the balance sheet. It will be amortized, usually using straight-line method, over the tenor of the bond.

Dr. Cash XXX

Dr. Deferred interest charge XXX

Cr. Bonds payable XXX

where Cash = Bonds payable (or market value at issuance) - deferred interest charge (or issuance costs)

#8

Seems right for IFRS, but how does the BS balance if the DR and CR don’t equate?

For US GAAP, shouldn’t issuance cost be expensed (amoritized) on the IS too?

#9

For IFRS, Debit IS equal to credit. They’re both equal to bond value at issuance minus issuance costs upon initial recognition. For GAAP, yes, the deferred financing charge is amortized in the IS over the tenor of the bond.