ACYFARP: Financial Asset at Amortized Cost - Bond Investment

Bond

Is a formal unconditional promise made under seal to pay a specified sum of money at a determinable future date, and to make periodic interest payments at a stated rate until the principal sum is paid.

Bond

A contract of debt whereby one party called the issuer borrows funds from another party called the investor.

Bond

Is a debt security because the bondholder is a creditor and the issuer is a debtor.

Bond

Is evidenced by a certificate and the contractual agreement between the issuer and investor is contained in another document known as the bond indenture.

Fair Value Plus Transaction Costs that are Directly Attributable to the Acquisition

This is the initial measurement of a bond investment.

Expensed Immediately

The treatment of transaction costs attributable to the acquisition of a bond investment held for trading or at fair value through profit or loss.

Subsequent Measurement of Bond

Include the following:

a. Fair Value through Profit or Loss

b. Amortized Cost

c. Fair Value through Other Comprehensive Income

True

(True or False) When bonds are acquired between interest dates, meaning the date of acquisition is not any one of the interest dates, the purchase price normally includes the accrued interest. That portion of the purchase price representing accrued interest should be reported as part of the cost of investment but should be accounted for separately.

Cash Proceeds from Sale of Bonds at FVPL (With Accrued Interest)

Selling Price + Accrued Interest (If any)

True

(True or False) The interest income from bonds recorded at FVPL shall not be based on the carrying amount, but rather, on the market value of the bond.

True

(True or False) When bond investment is held for trading or measured at fair value through profit or loss, it is not necessary to amortize any premium or discount.

Investment in Bonds at Amortized Cost

Bonds that are both:

a. Held in order for the collection of contractual cash flows on specified dates.

b. Such contractual cash flows are solely payments of principal and interest on the principal amount outstanding.

Amortized Cost

Is the initial recognition amount of the investment minus repayments, plus amortization of discount, minus amortization of premium, and minus reduction for impairment or collectibility.

True

(True or False) When bonds are acquired and classified as financial asset at amortized cost, the bond investments are classified as noncurrent investments.

Amortized Cost

The subsequent measurement of bonds measured at amortized cost.

Bond Premium or Discount

Is amortized over the remaining life of the bonds from the date of acquisition to the date of maturity.

Bond Premium

Is a loss on the part of the bondholder because the bondholder paid more than what can be collected on the date of maturity. Such loss is not recognized outright but allocated over the life of the bonds to be offset against the interest income to be derived from the bond investment.

Bond Discount

Is a gain on the part of the bondholder because the bondholder paid less than what can be collected on the date of maturity. Such gain is not recognized outright but allocated over the life of the bonds to be added to the interest income derived from the bond investment.

Amortization

The process of allocating the bond premium as deduction from interest income and the bond discount as addition to interest income.

Sale of Bonds Prior to Maturity

In this scenario, it is necessary to determine the carrying amount of the bond investment to be used as basis in computing gain or loss on the sale. In such a case, amortization of the premium or discount should be recognized up to the date of sale. If the sale is between interest dates, the sale price normally includes the accrued interest. Accordingly, that portion of the sale price pertaining to the accrued interest should be credited to interest income.

Gain or Loss on Sale of the Investment

The difference between the sale price, after deducting the accrued interest, and the carrying amount of the bond investment.

Callable Bonds

Are those which may be called in or redeemed by the issuing entity prior to their date of maturity.

Call Price or Redemption Price

Usually, is at a premium or more than the face amount of the bonds.

Gain or Loss on Callable Bonds

The difference between the redemption price and the carrying amount of the bond investment on the date of redemption.

Convertible Bonds

Are those which give the bondholders the right to exchange their bonds for share capital of the issuing entity at any time prior to maturity.

True

(True or False) The existence of the conversion feature generally precludes classification of the convertible bonds as financial assets at amortized cost because that would be inconsistent with paying for the conversion feature, meaning the right to convert into equity shares before maturity.

Serial Bonds

Are bonds which have a series of maturity date or those bonds which are payable in installments.

Term Bonds

Are those bonds that mature on a single date.

Straight Line Bond Amortization Method

Provides for an equal amount of premium or discount amortization each accounting period. The annual amortization of discount and premium as simply computed by dividing the amount of discount and premium by the life of the bonds.

Bond Outstanding Method

An amortization method applicable to serial bonds and provides for a decreasing amount of amortization.

Effective Interest Method

An amortization method that provides for an increasing amount of amortization.

True

(True or False) Under IFRS, bond investments shall be classified as financial assets measured at amortized cost using the effective interest method.

True

(True or False) The straight line method and bond outstanding method are acceptable only when the computation will result in periodic interest income that is not materially different from the amount that would be computed using the effective interest method.

Effective Interest Method

Also known as the scientific method of amortization. It simply requires the comparison between the interest earned or interest income and the interest received.

Premium or Discount Amortization

Difference between the interest earned and interest received.

Interest Income

Effective Rate x Carrying Amount of the Bond

Effective Rate

Is the actual or true rate of interest which the bondholder earns on the bond investment.

Interest Received

Nominal Rate X Face Value of the Bond

Carrying Amount of Bond

Is the initial cost gradually increased by periodic amortization of discount or gradually reduced by periodic amortization of premium.

Cost of Bond = Face Amount of Bond

Effective rate is equal to the nominal rate.

Cost of Bond > Face Amount of Bond

Effective rate is lower than the nominal rate. There is a premium. It is essentially a loss on the part of the bondholder.

Cost of Bond < Face Amount of Bond

Effective rate is higher than the nominal rate. There is a discount. It is essentially a gain on the part of the bondholder.

True

(True or False) Amortization is done on every interest date rather than at the end of the reporting period.

Bonds Measured at FVOCI

Bonds that are:

a. Intended for contractual cash flow collection and selling/trading.

b. The contractual cash flows are solely payments or principal and interest on the principal outstanding.

Interest income is recognized using the effective interest method as in amortized cost measurement.

True

(True or False) On derecognition of the bond investment at FVOCI, the cumulative gain or loss previously recognized in other comprehensive income shall be reclassified to profit or loss.

True

(True or False) On derecognition of equity investment at FVOCI, the cumulative gain or loss previously recognized in other comprehensive income shall be reclassified to retained earnings.

True

(True or False) Investment in bonds can be designated without revocation as measured at fair value through profit or loss even if the bonds are held for collection as a business model.

Fair Value Option

Under this bond valuation option, all changes in fair value are recognized in profit or loss. Accordingly, any transaction cost incurred is an outright expense. Moreover, the interest income is based on the nominal interest rate rather than the effective interest rate.

Market Price of Bonds

Is equal to the present value of the principal plus the present value of future interest payments using the effective rate.