Issuing and buying bonds: accounting by the issuer and the investor

One bond looks different in the books of two companies. For the one that issued it, it is a liability; for the one that bought it, an investment. Below we record the same hypothetical bond from both sides: issuer «Chorvoq Energiya» JSC and investor «Kumushkon Agro» LLC. Next to each entry is the paragraph and row of NAS No. 21; where the standard has no exact row, we say so openly.

Hypothetical data

• «Chorvoq Energiya» issued 2,000 bonds with a face value of 1,000,000 soums each, term 3 years.
• Coupon: 16% a year, paid twice a year.
• Selling price: 982,000 soums (at a discount).
• «Kumushkon Agro» bought 50 of them to hold to maturity.

Spreading the discount evenly is chosen here for simplicity: NAS No. 21 says the discount is allocated to expenses over the redemption period but does not set a specific method. Write the method into the accounting policy.

Issuer side: «Chorvoq Energiya» JSC

1. Bonds sold at a discount. Paragraph 82: the sale of bonds at a discount is recorded by debiting 0960 "Long-term deferred expenses on discounts" and the cash accounts for the amount received, and crediting 7830 (paragraph 84, row 17: Dr 0960 – Cr 7830). - Dr 5110 – Cr 7830: 1,964,000,000; - Dr 0960 – Cr 7830: 36,000,000.

As a result 7830 shows the face value (2,000,000,000).

2. The current portion of the discount is transferred and expensed. Paragraph 166, row 5: Dr 3220 – Cr 0960; paragraph 164 and paragraph 166, row 6: when the current discount is accrued, Dr 9610 "Interest expenses" – Cr 3220. 12,000,000 each year; spread monthly, 1,000,000 a month.

3. The coupon is accrued and paid. NAS No. 21 has no separate row for a bond coupon. 7830 belongs to the "Long-term loans and borrowings" group (7800), and paragraph 423 says that interest on borrowings and "other interest payment expenses" are debited to 9610 in correspondence with 6920 "Accrued interest" (paragraph 427, row 1: Dr 9610 – Cr 6920). The entry below is taken from that loans-and-borrowings row by analogy; the standard does not state it for bonds directly, so state in the accounting policy that this procedure is applied to bonds. - Each half-year (by analogy): Dr 9610 – Cr 6920: 160,000,000; - on payment: paragraph 226, row 24 Dr 6920 – Cr 5110: 160,000,000.

In a year 9610 receives 160,000,000 × 2 + 12,000,000 = 332,000,000 soums in total.

4. Final year: transfer to the current portion. Paragraph 334 and paragraph 336, row 6: Dr 7830 – Cr 6950 "Long-term liabilities — current portion": 2,000,000,000.

5. Redemption. Paragraph 309, row 11: Dr 6950 – Cr 5110: 2,000,000,000. If bonds with a term of up to 12 months were carried on 6830, redemption follows row 7 of paragraph 296: Dr 6830 – Cr 5110–5530.

Issue costs (broker, registration and so on) under paragraph 425: Dr 9630 – Cr liability or cash accounts.

When sold at a premium. Suppose the bonds were sold at 1,012,000 soums: proceeds 2,000 × 1,012,000 = 2,024,000,000, premium 2,000 × 12,000 = 24,000,000 soums. Paragraphs 334 and 323: face value to 7830, premium to 7220 "Long-term deferred income in the form of premiums": - Dr 5110 – Cr 7830: 2,000,000,000; - Dr 5110 – Cr 7220: 24,000,000 (paragraph 328, row 3); - current portion: Dr 7220 – Cr 6220 (paragraph 328, row 4; paragraph 269, row 6); - to income: Dr 6220 – Cr 9530 (paragraph 264; paragraph 269, row 5); spread evenly, 24,000,000 / 3 = 8,000,000 a year.

Investor side: «Kumushkon Agro» LLC

1. Purchase. Held to maturity, i.e. for more than 12 months: a long-term investment (NAS No. 12, paragraph 6). Paragraph 60, row 6: Dr 0610 – Cr 5110: 49,100,000. If there is a broker's fee, under paragraph 9 of NAS No. 12 it is also included in the purchase cost. For a bond held for up to a year, account 5810 is used (paragraph 241).

2. The discount is accrued gradually. Paragraph 59: if the purchase price is below face value, the difference is accrued until redemption, Dr 0610 – Cr 9590 "Other income from financial activities" (paragraph 60, row 11 "a"). 300,000 each year. On the redemption date 0610 shows 49,100,000 + 900,000 = 50,000,000, i.e. the face value: exactly what the second subparagraph of paragraph 59 requires.

When bought above face value, the difference is reduced gradually instead: Dr 9690 – Cr 0610 (paragraph 60, row 11 "b").

3. Coupon. Paragraph 59, paragraph 416 and paragraph 216, row 5 "a": Dr 4830 "Interest receivable" – Cr 9530 "Income in the form of interest": 4,000,000; when the money arrives, paragraph 216, row 6: Dr 5110 – Cr 4830: 4,000,000.

The tax side: under Article 483, part 27, of the Tax Code, until 31 December 2028 income of legal entities in the form of interest on bonds of business companies is exempt from corporate profit tax. «Chorvoq Energiya» is a business company, so the coupon income of «Kumushkon Agro» is not subject to corporate profit tax during this period. In the books the income is still recognised on 9530: the relief affects the tax calculation, not the journal entry.

4. Redemption. Paragraph 60, row 14 "Redemption (repurchase) of securities accounted for as long-term investments": Dr 5110 – Cr 0610: 50,000,000.

Alternative procedure for the investor: discount as deferred income

NAS No. 21 also sets out a second procedure for the investor's discount. Under paragraphs 263 and 322, when bonds are bought at a discount, the discount amount is credited to 7210 (long-term portion) or 6210 (current portion), the amount paid is credited to cash accounts, and the investment account is debited (paragraph 269, row 1: Dr 0600, 5800 – Cr 6210, 5110–5530). The discount is then transferred in parts: Dr 7210 – Cr 6210 (paragraph 269, row 3), Dr 6210 – Cr 9530 (paragraph 269, row 2).

Both procedures give the same result: 900,000 soums of discount income over 3 years. The difference is only in the accounts. The company must choose one and write it into its accounting policy.

Short checklist

1. At the issuer, is the face value on 6830 or 7830, the discount on 0960/3220, the premium on 7220/6220?
2. Does the accounting policy contain the method for allocating discount and premium?
3. Is it written in the accounting policy which entry is used to accrue the coupon?
4. In the last 12 months, has the long-term portion been transferred to 6950?
5. At the investor, on the redemption date, does the balance of 0610 (or 5810) equal the face value?