bond reporting on financial statements... big picture

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KMeriwetherD

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I am attempting to consolidate how a company would report it’s debt issued as a coupon bond on all 3 financial statements. If anyone sees any errors let me know.
cash flow statement: The coupon payments will be reported in CFO. The cash recived at issue (at par, discount or premium) will go in CFF. At maturity the face value of the bond comes out of CFF
income statement: coupon PMT +/- amortization is reported after operational income. If the bond was issued at par, there is no amortization. Otherwise amortization is determined by [(PV of future cash flows discounted at initial market rate) x (initial market rate)] - (coupon PMT).
balance sheet: at issuance both the assets and liabilities report a value equal to the proceeds recieved for the bond. This value also corresponds to the bond’s book value (which is the PV of cash flow discounted at initial rate). Each period, the bond liability is restated by recalculating the book value.
can anyone spot anything that is inaccurate or misunderstood?
One question I do have ……. at maturity, where is the payment of the face value reported on the income statement?
 
I think your understanding is accurate. Your question has already been answered on this forum, search for ‘How does principal repayment affect the financial statements’.
 
KMeriwetherD wrote:
One question I do have ……. at maturity, where is the payment of the face value reported on the income statement?
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You clearly pointed an accounting bond treatment in FS. There is no bond FV report in IS since this is kind of loan principle (liabillty in BS) and once when you settle this debt (make a principle payment at maturity) you have no further CF outflows nor expenditures. The only IS items are coupons increased/decreased with premium/discount amortisation during tenor of the bond. You may consider it as ordinary loan. The principle of loan what you borrow from a bank is not your expense (thus IS item), it is your liability from borrowings (a BS item). The interest costs are the “price” of that loan so those are your expenses (an IS items).
 
KMeriwetherD wrote:I am attempting to consolidate how a company would report it’s debt issued as a coupon bond on all 3 financial statements.
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You introduction says “issuing debt” but your post is actually about owning bonds (the opposite). Be clear that:
  • issuing a bond = borrowing money
  • buying a bond = lending your money
Yes Flashback is right, at maturity:
  • assets go down by FV (because you lose the security) AND
  • assets go up by FV (because you get the cash)
Since the two changes offset each other, there is no change to Equity, so no need for anything to go through the Income Statement. I think of the IS as explaining why Equity as grown or shrunk.
(but the cash inflow at maturity will of course be recorded on the Cash Flow Statement)
In level 2 you learn 4 different styles of reporting bonds on the balance sheet, so there is no ONE correct answer to learn at level 1.
As for the coupon payments on the income statements, seems mostly right. The formula is correct but I prefer to think of it as:
amortization = current BV * initial YTM - coupon
As for Cash Flow Statement,
US GAAP
  • coupon received: CFO
IFRS
  • coupon received: CFO or CFI
 
^^ my post is definitly about the issuing of debt. In cash flow, the coupons are being paid, not recieved. In income, the payment of coupons and interest is an expense, not income. On the balance sheet the debt liablitity is being reduced as the coupon are paid to the owner of the debt.
savy?
If it was for an owner of debt, the instrument would be treated as a “held-to-maturity security”
 
KMeriwetherD wrote:
^^ my post is definitly about the issuing of debt. In cash flow, the coupons are being paid, not recieved. In income, the payment of coupons and interest is an expense, not income. On the balance sheet the debt liablitity is being reduced as the coupon are paid to the owner of the debt.
savy?
If it was for an owner of debt, the instrument would be treated as a “security held for maturity”
Click to expand...
Coorect. Consider the debt-holder accounting just opposite:
- received coupons + premium/discount amortization as an income
- bond held to maturity as an asset
There are also likely some more complicate situation in real life with impairments booking (consider likely loss of credit rating of issuer or default etc.), then we have so called “decay” of security portfolio in category held to maturity.
 
thanks Flashback…. you are often very attentive on this forum. It is appreciated :-)
 
Pretty much spot on. Only nit picky thing id mention is that on the IS you will be seeing Interest Expense, not coupon pmts & amort. It will be the ACCRUED interest on the coupon & accrued amort/deprec, you do not really ever see coupon payments on the IS, just accruing expenses. The other side of that double entry hits the balance sheet in an Interest Payable liability. When the coupon is paid that liability is reduced, cash is reduced and you will see it flow through the cash flow statement via CFO
 
You’re welcome. This forum keeps me in the mood for studying. I learn from other users and colleagues as well:)
 
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