Help me, I can't undetstand this sentence about "issuance costs of bonds"

CFA Level I FRA
#1

Now, I can’t be understanding this sentence that :

“Under IFRS, the initial bond liability on the balance sheet is reduced by the amount of the issuance costs”

Why do issuance costs reduce liability on B/S ?

In my view, When costs are capitalized, costs increase liability

Do i have known incorrect ?

#2

It does increase the liability in this case, because the liability increases as you amoratize the bond towards maturity. So the less liability you have starting out, the more amoratization you will incurr as a result. The initial bond liability is simply the amount of money you recieve, while debiting the cash account in exchange.

#3

I think it can be explained as below. Maybe S2000 can chime in.

you issued a bond for $100, incurred say $3 to issue to bond.

you could look at it in two ways

incur liab for $100 + pay $3 (for issuance)

OR

incur liab for $97

2nd approach is what they are talking about above.

#4

Think about this in an Assets = Liabilities framework:

Taking cpk123’s numbers: issue proceeds = 100, but you incurred issue costs = 3.

What does this do to your cash position within assets? The change is given as: +100 (proceeds) - 3 (cash outflow to cover issuance costs) = +97 of net increase within cash and assets in general.

So, for the balance sheet to balance, you need to increase liabilities by the same +97. The initial bond liability is equal to the full issue proceeds (+100), BUT when you factor in the issuance costs, they actually REDUCE the liability (by 3).

Hope that makes sense.

#5

Actually, it _ de creases_ the liability: it’s paid in advance, so it’s not a liability.

#6

cpk123 highlighted the difference between US GAAP and IFRS:

  • Under US GAAP, you would show Cash of $97, Prepaid Issuance Costs (an asset) of $3, and Bonds Payable of $100. The Prepaid Issuance Costs would be amortized (as an expense) over the life of the bonds.
  • Under IFRS, you would show Cash of $97, and Bonds Payable of $97. The $3 discount in Bonds Payable would be amortized (as part of interest expense) over the life of the bonds.
#7

Yes I know, I’m trying to explain in his own language how a lower liability accounts for the additional cost of issuance.

#8

Yes: you have this incorrect.

When you expense costs you have paid, you increase expenses, thereby decreasing net income, thereby decreasing retained earnings, thereby decreasing equity. Liabilities are not affected.

When you capitalize costs you have paid, you increase assets. Liabilities are not affected.

Liabilities are affected (increased) when you incur costs that you have not yet paid.