Bonds accounting treatment

[christinam]

Hello!
Please help, I have two questions regarding Bonds:

1) When bond holder has received consent fee (for example $2k), should the holder of bond recognise this in P&L like profit from bonds, or decrease the value of the asset???

and

2) In case when bondholder received some amount as partial redemption of the bond (i.e. received to its bank $70k) what will be the accounting entry in the books of bondholder?

DR Bank $70k
CR what? The asset or profit in P&L???


Thanks =))

[JakobLavrod]

It would help to get a little more context on the specific transaction here.

1) Is what is going on that you each month receive a constant fee 2k in perpetuity or is there some limitation? In both cases, you are then dealing with an annuity. What you do initially, is to compute the effective interest that discounts all the future 2k payments back to the present purchase price of the bond (assuming fair market conditions). Then, each month you take the gross carrying amount (which start as purchase price), accrue interest and then subtract of the fee to get the new gross carrying amount.

2) Is the bond being derecognized? In that case, you derecgonize the gross carrying amount. However, bonds that can prepaid without given full compensation are a bit tricky, the the probability of prepayment create a material fair value difference, they are probably strictly speaking supposed to go as FVPL (tho in practice I have rarely seen that done)

[DJP]

Hi christianm,

1) P&L

2) Cr financial asset (bond)

[christinam]

thanks for your replies.

1) Actualy the Company received only once this consent fee from one particular bond. It is not monthly payments, so I was thinking to recognise it as income from bond. But was not sure.

2) For the second case- the bond was not derecognised. It is still on the bsheet with the same quantity. But during the year bondholder received two times this partial redemption amounts.

[JakobLavrod]

1) Strictly speaking, you are supposed to include this fee in your cash flow forecast, use it to compute a new EIR, and then use that over the lifetime of the bond.

2) If there was reasonable information in advance that this could happen, you should include it in the EIR calculation. When it happens, you do a modification adjustment to the PnL (however less sure here on the accounting entries, so feel free for anyone else here )

[christinam]

okkk thanks) One clarification - these bonds which company holds are recognised as fin asset at FVTPL. Does it change anything? =))))))))))

[DJP]

Good morning. Allow me to disagree with a point made by JakobLavrod. A consent fee is not a transaction cost and should not be included in the EIR calculation. Also, the EIR should never be changed, except in a few scenarios involving hedge accounting.

If the bonds are recognised at FVTPL then EIR does not apply. You just recognise any fair value changes in P&L. The consent fee is not part of the fair value measurement and should be recorded in P&L separately.

[JakobLavrod]

Thank you for the input DJP. First and foremost a bit of oversight from me to not ask for the accounting treatment, I wrote it based on the assumption of being Amortized Cost, but yes, with FVTPL is very different, thank you for bringing this up. Second error is clearly on me, read "constant" when it should be consent. Thanks for the assist here !

[DJP]

Welcome

[Marek Muc]

Also, the EIR should never be changed, except in a few scenarios involving hedge accounting.

I hope I'm not stretching the context too much, but it's actually quite common to revise the EIR for floating-rate instruments (obviously not the case in this scenario) https://ifrscommunity.com/knowledge-bas ... rest-rates

[DJP]

Yes, you revise the EIR for floating rate instruments, but only due to changes in interest rates and not because you incur extra costs/fees that have nothing to do with the issuance or acquisition of the instrument.

[JakobLavrod]

Out of interest DJP, just to understand, what is the argument for that the consent fee is not a transaction cost? This is probably more due to me not being very knowledgeable about bond trading conditions (due to being mostly in the retail lending space).

[DJP]

Hi Jakob,

From the investor's point of view, a transaction cost is a cost directly attributable to the acquisition or disposal of the financial asset. A consent fee is a cost that you normally incur sometime during the life of the financial asset (for example to agree to the dilution of the bondholders' rights). Therefore, it is not a transaction cost by definition. christinam could perhaps clarify us about the purpose of the consent fee, but in this case it is irrelevant given that the instrument is accounted for at FVTPL.

[christinam]

Hi everyone! thanks a lot for your help =)
I was reviewing broker's statements of a new audit client. And found this one incoming with descriptions "CA PURCHASE OFFER+MEETING+FEE Eurobond Alliance Oil - CONSENT FEE: USD 12.5 per multiple of instructed amount"...As DJP said, I understood that it was some sort of "compensations/income" for our client (who is bondholder). Client recognised it as income in P&L. So I wanted to be sure for the correctness. Did not have any experience before with consent fees =)
I don't have any more details for this transaction.

[Marek Muc]

I'd look into the exact nature of this consent fee and check if the holder has accepted new conditions that should be reflected in the fair value measurement, especially if these bonds aren't traded on a public market.