AFM391 Lecture Notes - Lecture 13: Book Value, Accrued Interest
28 Jun 2018
School
Department
Course
Professor
Derecognition Through Offsetting and In-Substance Defeasance
Offsetting
I owe someone $10, but they owe me $15; it shows they owe me $5
o
Practice of showing the net dollar amount of related assets and liabilities on the balance sheet rather than separate
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E.g. if I don’t show the $10 I owed someone else, I can still borrow $10
o
Improves financial ratios and free up borrowing capacity from covenants and maximum debt.
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Offsetting compromises the user’s ability to correctly interpret the financial results
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Reporting entity must intent to settle on a net basis and legally able to offset amounts against each other
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Offsetting reflects economic substance of the situation
o
Ex. Entity has two chequing accounts with same bank, one which is overdrawn
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In-Substance Defeasance
Arrangement where funds sufficient to satisfy a liability are placed in trust with a third party to pay directly to the
creditor at maturity
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Companies want to satisfy a liability before maturity date, but restrictions don’t let them
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Defeasance would result in derecognition only if creditor formally confirms entity is no longer liable
Borrower cannot derecognize the obligation through in
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substance defeasance
o
Its pretty shit because of IFRS rules
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Comprehensive Bond
CCL Sold $10,000,000 five year 5% bonds dated January 1, 2018 for $9,500,000. CCL used the proceed to pay off its
investment bank's fee of $200,000 and legal fees of $300,000
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Interest is payable on June 30 and December 31 each year
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Maturity value is $10,000,000 and PV is $9,000,000
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Callable bonds on January 1, 2020 at 102 means (102% of face value plus accrued interest) and the company ends up
calling 60% of the bond on the call date.
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Record Bond Issuance
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Same for next payments until December 31, 2019 except different interest expense
o
Record Interest Accrued
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AFM 391 Page 7
Document Summary
Practice of showing the net dollar amount of related assets and liabilities on the balance sheet rather than separate. I owe someone , but they owe me ; it shows they owe me . Improves financial ratios and free up borrowing capacity from covenants and maximum debt. E. g. if i don"t show the i owed someone else, i can still borrow . Offsetting compromises the user"s ability to correctly interpret the financial results. Reporting entity must intent to settle on a net basis and legally able to offset amounts against each other. Entity has two chequing accounts with same bank, one which is overdrawn. Offsetting reflects economic substance of the situation o o o o. Arrangement where funds sufficient to satisfy a liability are placed in trust with a third party to pay directly to the creditor at maturity. Companies want to satisfy a liability before maturity date, but restrictions don"t let them.
