DEBT SECURITIES

Investment in Bonds
Bond
1. A bond is a formal unconditional promise made under seal to pay a specified sum
of money at a determinable future date and to make periodic interest payments
at a stated rate until the principal sum is paid.
2. The issuer of the bonds is the borrower of the funds.
3. The investor is the lender of the funds.
4. Bond indenture is the group contract between the issuer and the bondholders.
The indenture details the rights and obligations of the contracting parties,
indicates the property pledged as well as the protection offered on the loan and
name of the bank or trust company that is to represent the bondholders.
5. Bond certificates represent evidence of indebtedness. Bonds are usually issued
in denominations of P1,000 or more.
6. Interest is usually paid every six months.
7. Bond investment may either be current or non-current.

Classification of Bond Investment

1. Trading Securities
2. Available for Sale
3. Held to Maturity

Valuation of Debt Securities

1. Trading Securities at fair value
2. Available for Sale at fair value
3. Held to Maturity at amortized cost

Definition of Terms
1. Bond Premium the excess of the acquisition cost over the face value of the
bond investment
2. Bond Discount the excess of the face value of the bond investment over its
acquisition cost.

Methods of Amortization
1. Straight-line provides for an equal amount of amortization for each accounting
period.
2. Accelerated applicable to callable bonds

3. Bond Outstanding applicable to serial bonds

4. Effective or Scientific Method
a. Nominal or Coupon or Face Rate rate appearing on the face of the bonds
b. Effective or Yield Rate true or actual rate of interest which bondholder earns
on his investment.

Special Types of Bonds

1. Callable Bonds those which may be called in or redeemed by the issuing
corporation prior to their maturity date.
2. Convertible Bonds those which give the bondholders the right to exchange their
bonds for other securities of the issuing corporation.
3. Serial Bonds those which have a series of maturity dates or those bonds which
are payable in installments.

Tainting Period
If an entity sells or reclassifies more than an insignificant amount of HTM securities prior
to maturity, the entity is disqualified from using the HTM classification during the current
year and the next two years.

Pro-forma Entries Trading Securities

Purchase of
Bonds
On an Interest
Payment Date

Investment in trading securities bonds

Cash

xxx

Purchase of
Investment in trading securities bonds
Bonds
Interest income
Between Interest
Cash
Payment Dates

xxx
xxx

Receipt of
Interest

Cash
Interest Income

xxx

Fair Value
adjustment

Investment in trading securities bonds

Unrealized gain on trading securities

xxx

Unrealized loss on trading securities

Investment in trading securities bonds

xxx

Cash

xxx

Sale of
2

xxx

xxx

xxx
xxx
xxx

Bonds on an
Interest
Payment Date

Loss on sale of trading securities bonds

Investment in trading securities bonds
Gain on sale of trading securities bonds

xxx

Sale of
Cash
Bonds
Loss on sale of trading securities bonds
Between Interest
Investment in trading securities bonds
Payment Dates
Interest income
Gain on sale of trading securities bonds

xxx
xxx

xxx
xxx

xxx
xxx
xxx

Amortization of
Note: Amortization is not required if the bond
Bond Premium or investment is temporary in nature.
Discount

Pro-forma Entries Available for Sale Securities

Purchase of
Bonds
On an Interest
Payment Date

Investment in AFS securities bonds

Cash

xxx

Purchase of
Investment in AFS securities bonds
Bonds
Interest income
Between Interest
Cash
Payment Dates

xxx
xxx

Receipt of
Interest

Cash
Interest Income

xxx

Amortization of
discount

Investment in AFS securities bonds

Interest Income

xxx

Amortization of
premium

Interest Income
Investment in AFS securities bonds

xxx

Fair Value
adjustment

Investment in AFS securities bonds

Unrealized Increase/Decrease in AFS

xxx

Sale of
Bonds on an
Interest
Payment Date

Cash
Loss on sale of AFS securities bonds
Unrealized Increase/Decrease in AFS
Investment in AFS securities bonds
Gain on sale of AFS securities bonds
Unrealized Increase/Decrease in AFS

xxx
xxx
xxx

xxx

xxx

xxx
xxx
xxx
xxx

xxx
xxx
xxx

Sale of
Bonds

Cash
Loss on sale of AFS securities bonds
Unrealized Increase/Decrease in AFS
Between Interest
Investment in AFS securities bonds
Payment Dates
Interest income
Gain on sale of AFS securities bonds
Unrealized Increase/Decrease in AFS

xxx
xxx
xxx
xxx
xxx
xxx
xxx

Pro-forma Entries Held to Maturity Securities

Purchase of
Bonds
On an Interest
Payment Date

Investment in held to maturity securities bonds

Cash

xxx

Purchase of
Bonds
Between
Interest
Payment Dates

Investment in held to maturity securities bonds

Interest income
Cash

xxx
xxx

Receipt of
interest

Cash
Interest income

xxx

Amortization of
Premium

Interest income
Investment in held to maturity securities bonds

xxx

Amortization of
Discount

Investment in held to maturity securities bonds

Interest income

xxx

Redemption of
Bonds on
Maturity Date

Cash
Investment in held to maturity securities bonds

xxx

xxx

xxx

xxx
xxx
xxx
xxx

Sale of
Cash
Bonds
Loss on sale of held to maturity securities bonds
Prior to Maturity
Investment in held to maturity securities bonds
On an Interest
Gain on sale of held to maturity securities bonds
Payment
Date
* Update premium/discount amortization.

xxx
xxx

Sale of Bonds

xxx

Cash

xxx
xxx

Prior to Maturity Loss on sale of held to maturity securities bonds

Between
Investment in held to maturity securities bonds
Interest
Interest income
Payment
Gain on sale of held to maturity securities bonds
Dates
*Update premium/discount amortization.

xxx
xxx
xxx
xxx

Reclassification
from HTM to
AFS

Note: PAS 39 provides that if as a result of a change

in intention or ability, it is no longer appropriate to
classify an investment as HTM, it shall be reclassified
as AFS and remeasured at fair value and the
difference between its carrying amount and the fair
value shall be recognized directly in equity, through
the statement of changes in equity.

Carrying value
higher than
fair value

Investment in available for sale securities - bonds

Investment in held to maturity securities - bonds

xxx

Unrealized increase/decrease in value of AFS

Investment in available for sale securities - bonds

xxx

Investment in available for sale securities - bonds

Unrealized increase/decrease in value of AFS
Investment in held to maturity securities - bonds

xxx

Carrying value
lower than
fair value

xxx
xxx
xxx
xxx

Reclassification Note: PAS 39, paragraph 54, provides that if as a

from AFS to HTM result of a change in intention or ability, it becomes
appropriate to carry financial asset at amortized cost
rather than at fair value, the fair value carrying
amount becomes the amortized cost.
Any previous gain or loss on that asset that has been
recognized directly in equity shall be amortized to
profit or loss over the remaining life of the held to
maturity investment using the effective interest
method.
Any difference between the new amortized cost and
maturity amount shall also be amortized over the
remaining life of the financial asset using the effective
interest method.

Amortization of
5

Investment in held to maturity securities - bonds

Investment in available for sale securities - bonds

xxx

Interest income

xxx

xxx

Unrealized loss
On AFS
Amortization of
Unrealized gain
on AFS

Unrealized increase/decrease in value of AFS

Unrealized increase/decrease in value of AFS
Interest income

Financial Statement Presentation

Investment in trading securities bonds
Investment in available for sale securities bonds
Investment in held to maturity securities bonds
Loss on sale of held to maturity securities bonds
Gain on sale of held to maturity securities bonds
May 2009

Current asset
Current or Non-current asset
Non current asset
Other expense
Other income

xxx
xxx
xxx