Financial Reporting and Analysis III
Reading 28. Non-current (Long-term) Liabilities
Learning Outcome Statements
e. describe the financial statement presentation of and disclosures relating to debt;
CFA Curriculum, 2020, Volume 3
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Subject 5. Presentation and Disclosure of Long-Term Debt
Bonds payable and unamortized discounts or premiums are typically shown on the balance sheet as long-term liabilities. Bond discount is reported as a direct deduction from - and bond premium as a direct addition to - the face value of the bond. If a bond issue will mature within a year, it should be reported as a current liability if the issue will be retired using current assets. However, the issue should continue to be reported as a long-term liability if it is to be replaced with another bond issue, converted into stock, or paid off with noncurrent assets.
Financial statement footnotes provide more information on the type and nature of a company's debt: stated and effective interest rates, maturity dates, restrictions imposed by creditors, and collateral pledged (if any). An MD&A also provides other information on a company's capital resources, such as debt financing and off-balance-sheet financing.
For bonds issued at a premium or discount, reporting coupon payments as cash outflow from operations is inappropriate. For example, if a bond is sold at a premium, part of the coupon payment is used to amortize the premium and reduce the principal, and therefore should be treated as a financing cash outflow. As a result, CFO is understated and CFF is overstated by the amortization amount of the bond's premium.
Debt with Equity Features
A company can issue a bond that is convertible into shares or a bond with a warrant attached. The reason for doing this is to add a sweetener to a bond issue. Because of the benefit to the investor (the ability to obtain shares of the company), the issuer is able to issue the bonds at a lower interest rate than would be the case for a straight bond.