Accounting Principles For Bonds Kabir Okunlola, KPMG

Accounting
g for bonds
Bond
B
dT
Training
i i Workshop
W k h for
f
Accountants and Insurance Companies
Presented by Kabir Okunlola
Partner, KPMG professional Services
September 2011
Learning objectives
At the end of this course,
you will:
2011 KPMG Professional Services, a partnership registered in Nigeria and a member firm of
the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in Nigeria.
1))
Understand
U
d t d th
the accounting
ti
requirements under SAS
2)
Understand the accounting

requirement under IFRS
IFRS.
Accounting for bonds 2
Agenda
Definitions
Accounting treatment under SAS
Classification and measurement under
IFRS
Definitions Bonds
Debt instrument issued for a
period of more than one year with
the purpose of raising capital by
borrowing.
Usually issued by the

government (federal, state or
local government), corporations,
and other institutions.
They are tradable instruments and

can be held until redemption.
Can be classified as long term or

short term depending
p
g on the
intention of the holder of the
instrument.
2011 KPMG Professional Services, a partnership registered in Nigeria and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a
Swiss entity. All rights reserved. Printed in Nigeria.
Agenda
Definitions
IFRS
Classification
Bonds
Classification under SAS (13)
Long term
investments
Short term
investments
Tenure > 12 months

and held to maturity
if held for trading or

Tenure< 12 months
Investment
properties
Measurement
Long term investment should be stated at cost or
revalued amounts
SAS 13 40
Short term investments should be stated at lower of

costs and net realisable value
SAS 13 37
Discount or premium amortised over the period to maturity.

Amortised premium or discount is credited or charged to profit
and loss.
SAS 13 24
Agenda
Definitions
IFRS
Definitions Financial Instruments- IAS 39

A financial instrument is a contract that gives rise to:
a financial asset of one entity and
a financial liability or equity instrument of another entity
Financial
asset
Cash
Equity instrument of
another entity
Contractual right to
receive cash or another
financial asset (for
example,
p loans and
receivables) or to exchange
financial assets or liabilities
under potentially favourable
conditions
Certain contracts settled in
the entitys own equity
Financial
liability
Contractual obligation to
deliver cash (for example,
accounts
t payable)
bl ) or
another financial asset or to
exchange financial asset or
liabilities under potentially
unfavourable conditions
C t i contracts
Certain
t t settled
ttl d in
i
the entitys own equity
Except for certain puttable
financial instruments and
obligations arising only
upon an entity's liquidation
Eq
it instr
ment
Equity
instrument
Contract evidencing
a residual interest in the
assets
t off an entity
tit after
ft
deducting all of its liabilities
Fair value is the amount for which an asset could be exchanged, or

a liability
knowledgeable,
parties
li bilit settled,
ttl d between
b t
k
l d
bl willing
illi
ti in
i an arm's
'
length transaction.
Amortised cost is initial recognition - repayments of principal impairment or uncollectibility +/- cumulative amortisation of the
difference between the initial amount and the maturity amount.
Effective Interest rate is

i the
th rate
t that
th t exactly
tl discounts
di
t the
th
cash flows associated with an instrument to the net carrying amount
at initial recognition.
Classification under IFRS
Bonds
Classification of financial instruments under IFRS
At fair value
through
profit or loss
Held to
maturity
Loans and
receivables
Available for
sale
financial
assets
Categories of financial assets

Definition
Category
Financial assets at
fair value through
profit or loss
Financial assets held for trading

Derivatives, unless accounted for as a hedging
instrument
Loans and
receivables
Non-derivative financial assets with fixed or

determinable payments that are not quoted in an active
market
Held-to-maturity
H
ld t
t it
investments
Non-derivative
Non
derivative financial assets with fixed or
determinable payments and fixed maturity that the
entity has the positive intent and ability to hold to
maturity.
Available-for-sale
financial assets
All financial
f
assets that are not classified
f
in another
category are classified as available-for-sale
Any financial asset designated to this category on
initial recognition
Initial recognition and subsequent measurement

Measured at fair value on initial recognition.
Transaction costs are included in the determination of fair value.
At fair value
through profit or
loss
At fair value
Changes in fair value through profit or loss
Held to maturity
and loans and
receivables
At amortized cost using the effective interest

rate
Available for sale

financial assets
At fair value
Changes in fair value through other
comprehensive income
Amortised costs measurement
Amortized
cost
Initial
recognition
amount
Cash
received
-/+
Interest
income
/expense
Impairme
nt
Measurement Amortised costs EIR and a Discount

Government bond at coupon rate of 19% over 2 years
Tenure
Present Value
Discount
Interest Payments
Future value
Effective interest
rate
Date
31-Dec-05
31-Dec-06
31-Dec-06
2 years
(1,450,000)
50,000
285,000 (19% on face value)
1,500,000
21.21%
Accounting
interest at
Cash flow at
effective interest
contractual
Opening balance rate (21.21%) interest rate (19%)
(1,450,000)
(1,472,603)
(1,500,000)
307,603
312,397
285,000
285,000
1,500,000
Closing
balance
(1,472,603)
(1,500,000)
-
Measurement Amortised costs EIR and Premium

Government bond at coupon rate of 19% over 2 years
Tenure
Present Value
Discount
Interest Payments
Future value
Effective interest
rate
Date
31-Dec-05
31-Dec-06
31-Dec-06
2 (2 years)
(1,600,000)
(100,000)
285,000 (19% on face value)
1 500 000
1,500,000
14.90%
Opening balance
Accounting
interest at
effective
interest rate
(14 90%)
(14.90%)
(1,600,000)
(1,553,468)
((1,500,000)
,
,
)
238,468
231,532
Cash flow at
contractual
interest
rate (19%)
Closing
balance
285,000
285,000
1,500,000
,
,
(1,553,468)
(1,500,000)
-
Impairment
A financial asset or a group of financial assets is impaired if, and
only if:
there is objective evidence of impairment as a result of one or
more events that occurred after initial recognition; and
the loss event has an impact on estimated future cash flows
An impairment
p
loss is measured as the difference between:
the assets carrying amount and the present value of
estimated future cash flows - for loans and receivables or
held-to-maturity investments; and
the net carrying value (acquisition cost net of any principal
repayment and amortisation) and current fair value-For
Available for sale investments.
Impairment
Indicators of impairment for debt securities (financial assets
recognised at amortised cost)
Significant financial difficulty of the issuer
Bankruptcy or financial reorganisation of the issuer
Disappearance
pp
of an active market for the bonds concerned
Measurable decrease in the estimated future cash flows
Impairment
Reversal of
impairment
Classification
Impairment
Trading
Adjusted through fair Adjusted through fair

value changes
value changes
Can be reversed
through income
Available for sale, Held
statements if the
to maturity
Recognised in income increase can be
instruments and loans statements
objectively related to
and receivables.
an event occurring
after the loss was
recognised
Agenda
Definitions
IFRS
Accounting under IFRS 9
Initially
I iti ll measured
d att fair
f i value
l and;
d
subsequently valued at amortised cost or at fair value through
profit or loss depending on the business model and
characteristics of the contractual cash flows
Is asset held within a business model whose

objective is to hold financial assets in order to
)
collect the contractual cash flows ((HTC)?
no
Accounting under IFRS 9
Do contractual terms of financial asset give rise

on specified
ifi d dates
d t to
t cash
h flows
fl
that
th t are solely
l l
payments of principal and interest on the
principal outstanding (SPPI)?
no
yes
Is financial asset designated as FVTPL

under fair value option?
yes
yes
Subsequent
measurement
FVTPL
no
Subsequent
measurement at
amortised cost
Fair value option: Financial assets

Does designation as FVTPL eliminate or significantly
reduce a measurement or recognition inconsistency
(accounting mismatch)?
yes
No
FV option may be
applied at initial
recognition and is
irrevocable
FV option prohibited
FVTOCI option: Investments in equity instruments
No option to value bonds at fair value through other

comprehensive income anymore
1) Under SAS, bonds may be

classified as either short term
investments or long term
investments
2) Under IFRS, bonds may be
classified into any
y of the 4
categories of financial assets
3) Under IFRS 9, bonds are
classified as measured at
amortised cost except when they
are designated as measured at
FVTPL
4) Subsequent measurement of
bonds will depend on the initial
classification.
classification
FOR INTERNAL USE ONLY. [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the
KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a
Swiss entity. All rights reserved.
Thank you
Contact details
Kabir Okunlola
KPMG Professional Services
+234 803 402 0954

www.kpmg.com
26
2011 KPMG Professional Services,, a partnership

p
p registered
g
in Nigeria
g
and a member
firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Printed in Nigeria.
The KPMG name, logo and "cutting through complexity" are registered
trademarks or trademarks of KPMG International Cooperative ("KPMG
International").

Accounting Principles For Bonds Kabir Okunlola, KPMG

Uploaded by

Copyright:

Available Formats

You might also like

Accounting Principles For Bonds Kabir Okunlola, KPMG

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounting Principles For Bonds Kabir Okunlola, KPMG

Uploaded by

Copyright:

Available Formats

Accounting

Understand the accounting

Accounting for bonds 2

Accounting for bonds 3

Usually issued by the

They are tradable instruments and

Can be classified as long term or

Accounting for bonds 4

Accounting for bonds 5

Tenure > 12 months

if held for trading or

Accounting for bonds 6

Short term investments should be stated at lower of

Discount or premium amortised over the period to maturity.

Accounting for bonds 7

Accounting for bonds 8

Definitions Financial Instruments- IAS 39

Accounting for bonds 9

Fair value is the amount for which an asset could be exchanged, or

Effective Interest rate is

Accounting for bonds 10

Classification under IFRS

Accounting for bonds 11

Categories of financial assets

Financial assets held for trading

Non-derivative financial assets with fixed or

Accounting for bonds 12

Initial recognition and subsequent measurement

At amortized cost using the effective interest

Available for sale

Accounting for bonds 13

Amortised costs measurement

Accounting for bonds 14

Measurement Amortised costs EIR and a Discount

Accounting for bonds 15

Measurement Amortised costs EIR and Premium

Accounting for bonds 16

Accounting for bonds 17

Accounting for bonds 18

Adjusted through fair Adjusted through fair

Accounting for bonds 19

Accounting for bonds 20

Accounting under IFRS 9

Accounting for bonds 21

Is asset held within a business model whose

Accounting under IFRS 9

Do contractual terms of financial asset give rise

Is financial asset designated as FVTPL

Accounting for bonds 22

Fair value option: Financial assets

Accounting for bonds 23

FVTOCI option: Investments in equity instruments

No option to value bonds at fair value through other

Accounting for bonds 24

1) Under SAS, bonds may be

Accounting for bonds 25

+234 803 402 0954

2011 KPMG Professional Services,, a partnership