How Companies Account for Issued Bonds
When a company issues a bond, it receives a cash payment from investors. This payment is recorded as an inflow under cash flows from financing activity. On the balance sheet a new liability is recorded in an amount equal to the cash received.
The cash a company receives when bonds are issued is typically the face value of the bond, adjusted for any premium or discount investors require. Even when bonds are meant to be issued at par, rates may change slightly between the time the bond coupon is set and the time the bond is issued. Any resulting premium or discount is to be amortized to the bond value over time. Discounts or premia that result from changes in the market interest rate after the bond is issued are not reflected on the firm’s financial statements.
Each year, the income statement will record a charge equal to the stated amount of interest, adjusted for the amortization of any issue-date premium or discount. The amortized premium or discount, as stated above, will then also be applied to the carrying value of the liability. The cash flow statement will reflect any cash paid, but not the amortized premium or discount, as a cash outflow from operating activities.
When the bond matures, the company will record the final interest payment on the income statement, a cash from financing activities outflow equal to the repaid principal, and eliminate the liability from the balance sheet.
For more information, see all articles on: Accounting, Financial Statement Analysis, Fixed income investments, Fundamental Analysis, Investing in bonds, Investment Returns, Valuation See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
