Accounting for Debt Retirement
When a company retires debt prior to its scheduled maturity, the difference between the carrying amount and the amount repaid is considered a gain or loss from continuing operations. However, investors may want to consider the gain or loss separately. The primary difference between carrying value and the amount repaid is likely due to shifts in market interest rates. If rates rise, the value of debt declines and companies could buy back their existing loans at less than face value. However, if they were to replace the loans with new debt they would have to pay the higher current market rate.
If the company is retiring debt and reissuing new debt, investors may want to ignore any resulting gains or losses because they do not reflect the underlying economic condition. At the same time, if new debt is not being issued then the gains or losses are unlikely to recur. Again, it may make sense to ignore the gain or loss for analysis purposes.
For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis, Investing in bonds 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)
