CFM4124 - Accounting for loan relationships: lenders: accrual accounting and discounted securities
Accounting for discounted securities
A discounted security is one acquired at a discount to its face value. The same accounting applies to a security issued at face value and redeemable at a premium (or any combination of discount/premium on acquisition and discount/premium on redemption). The return to the lender comprises the interest received on the bond plus the difference between the purchase price and the redemption price.
Example
Wellbeach plc issues a £100m bond paying interest at 2% for
£80m. The bond is redeemable at face value after 5 years. The
total return to the lender is equivalent to a fixed rate loan of
£80m with an interest rate of 6.9% (assuming that all but
£2m of the interest each year is rolled up into the balance
outstanding).
At inception the company passes £80m to the borrower,
i.e. purchases the loan.
| Debit debtor | £80m |
| Credit cash | £80m |
How does Wellbeach plc then account for this £100m loan? The accounting is set out at CFM4124a under an accruals basis.
