DEBT SECURITIES

Investment in Bonds
Bond
1. A 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.
2. The issuer of the bonds is the borrower of the funds.
3. The investor is the lender of the funds.
4. Bond indenture is the group contract between the issuer and the bondholders.
The indenture details the rights and obligations of the contracting parties,
indicates the property pledged as well as the protection offered on the loan and
name of the bank or trust company that is to represent the bondholders.
5. Bond certificates represent evidence of indebtedness. Bonds are usually issued
in denominations of P1,000 or more.
6. Interest is usually paid every six months.
7. Bond investment may either be current or non-current.

Classification of Bond Investment

1. Financial Asset at Fair Value --Trading Securities
2. Financial Asset at Amortized Cost -- Held to Maturity

Valuation of Debt Securities

1. Trading Securities at fair value
2. Held to Maturity at amortized cost

Definition of Terms
1. Bond Premium the excess of the acquisition cost over the face value of the
bond investment
2. Bond Discount the excess of the face value of the bond investment over its
acquisition cost.

Methods of Amortization
1. Straight-line provides for an equal amount of amortization for each accounting
period.
2. Accelerated applicable to callable bonds
3. Bond Outstanding applicable to serial bonds
4. Effective or Scientific Method prescribed in IFRS 9

a. Nominal or Coupon or Face Rate rate appearing on the face of the bonds
b. Effective or Yield Rate true or actual rate of interest which bondholder earns
on his investment.

Special Types of Bonds

1. Callable Bonds those which may be called in or redeemed by the issuing
corporation prior to their maturity date.
2. Convertible Bonds those which give the bondholders the right to exchange their
bonds for other securities of the issuing corporation.
3. Serial Bonds those which have a series of maturity dates or those bonds which
are payable in installments.

Pro-forma Entries Trading Securities

Purchase of
Bonds
On an Interest
Payment Date

Trading securities bonds

Cash

xxx

Purchase of
Trading securities bonds
Bonds
Interest income
Between Interest
Cash
Payment Dates

xxx
xxx

Receipt of
Interest

Cash
Interest Income

xxx

Fair Value
adjustment

Trading securities bonds

Unrealized gain on trading securities

xxx

Unrealized loss on trading securities

Trading securities bonds

xxx

Cash
Loss on sale of trading securities bonds
Trading securities bonds
Gain on sale of trading securities bonds

xxx
xxx

Sale of
Bonds on an
Interest
Payment Date

Sale of
Cash
Bonds
Loss on sale of trading securities bonds
Between Interest
Trading securities bonds

xxx

xxx

xxx
xxx
xxx

xxx
xxx
xxx
xxx
xxx

Payment Dates

Interest income
Gain on sale of trading securities bonds

xxx
xxx

Amortization of
Note: Theoretically, trading debt securities should
Bond Premium or amortize discount or premium. Recall that one of the
Discount
primary reasons for the amortization process is to
ensure the carrying amount is equal to its maturity
value. If securities are not classified as held-tomaturity, then the amortization process becomes
less relevant. [Intermediate Accounting by Skousen,
Stice and Stice 14E]

Pro-forma Entries Held to Maturity Securities

Purchase of
Bonds
On an Interest
Payment Date

Held to maturity securities bonds

Cash

xxx

Purchase of
Bonds
Between
Interest
Payment Dates

Held to maturity securities bonds

Interest income
Cash

xxx
xxx

Receipt of
interest

Cash
Interest income

xxx

Amortization of
Premium

Interest income
Held to maturity securities bonds

xxx

Amortization of
Discount

Held to maturity securities bonds

Interest income

xxx

Redemption of
Bonds on
Maturity Date

Cash
Held to maturity securities bonds

xxx

Sale of
Cash
Bonds
Loss on sale of held to maturity securities bonds
Prior to Maturity
Held to maturity securities bonds
On an Interest
Gain on sale of held to maturity securities bonds
Payment
Date
* Update premium/discount amortization.
3

xxx

xxx

xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

Sale of Bonds
Cash
Prior to Maturity Loss on sale of held to maturity securities bonds
Between
Held to maturity securities bonds
Interest
Interest income
Payment
Gain on sale of held to maturity securities bonds
Dates
*Update premium/discount amortization.

xxx
xxx
xxx
xxx
xxx

Reclassification Note: IFRS 9 provides that when an entity reclassifies

from Amortized a financial asset at amortized cost to financial asset
Cost to Fair Value at fair value, the fair value is determined at
reclassification date. The difference between the
previous carrying amount and fair value is recognized
in profit or loss.
Carrying value
higher than
fair value

Loss on reclassification of financial asset

Held to maturity securities - bonds

xxx

Carrying value
lower than
fair value

Held to maturity securities - bonds

Gain on reclassification of financial asset

xxx

Reclassification
Entry

Trading Securities - bonds

Held to maturity securities - bonds

xxx

xxx

xxx

xxx

Reclassification Note: IFRS 9 provides that when an entity reclassifies

from fair value to a financial asset at fair value to financial asset at
amortized cost
amortized cost, the fair value at the reclassification
date becomes the new carrying amount of the
financial asset at amortized cost.
The difference between the new carrying amount of
the financial asset at amortized cost and the face
value of the financial asset shall be amortized
through profit or loss over the remaining life of the
financial asset using the effective interest method.
Unrealized loss on trading securities
Trading securities bonds
OR
Trading securities bonds
Unrealized gain on trading securities

xxx
xxx
xxx
xxx

Held to maturity securities - bonds

Trading securities - bonds

xxx
xxx

Financial Statement Presentation

Trading securities bonds
Held to maturity securities bonds
Loss on sale of bonds
Gain on sale of bonds
Unrealized gain on trading securities
Unrealized loss on trading securities
Loss on reclassification of financial asset
Gain on reclassification of financial asset

June 2012

Current asset
Non current asset
Other expense
Other income
Other income
Other expense
Other expense
Other income