How To Issue Bonds And Account For Them Under NZ IFRS 9 Financial Instruments

Advantages and Risks of Issuing Bonds

The management of DGL ltd is planning to issue bonds for the purpose of raising the capital which is required by the business. Bonds may be defined as fixed income generating investments from the point of view of the investors. The bond is a source of loan capital for the business and the management can raise effective capital with the help of bonds (Ju, Leland & Senbet, 2014). The interest rate which is provided on such an investment is fixed. The bond can be issued at par and are normally offered with the help of a broker.

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The main advantages of bond are that it offers safety of interest income and also principle income for the investment. In addition to this, the main advantage of issuing bonds is that it helps the management of the company to effectively raise capital for the business in a fast and efficient manner (Chandra, 2017). The costs of issuing bonds are much cheaper than the costs which is incurred for issuing shares and stock of the business. In addition to this, borrowing capital from the market with the help of bonds allow businesses to take tax advantage of taking loans for the business. The risks which are associated with issue of bonds is that the returns are to be given at a higher rate for risky bonds of the business. In many cases, the businesses can not raise appropriate amount of funds for meeting the capital requirements of the business.

As per the provisions which are stated in IFRS 9, all financial instruments are to be measured initially at costs or less in case of financial assets of liabilities. As per the standard debt instruments should be measured at amortized costs unless the assets is designated at FVTPL under the fair value option.

Hedging is one of the technique which can be used by the management of a company to reduce the risks of adverse price movements in the assets of the business (Dong, Kouvelis & Su, 2014). Hedging is used by businesses to reduce the volatility in the market prices of securities of the business (Kallsen & Muhle?Karbe, 2015).

ASX SPI 200 Index futures is a benchmark for measuring equity indexed future contracts which are available in Australia. ASX SPI 200 Index futures is listed among the top ten equity indexed future contracts (Hull et al., 2013). As per the provisions of IFRS 9, Hedge Accounting is optional and the same is applicable only when certain conditions and stipulations are met in the business. The standard also specifies the disclosure requirements regarding the hedging agreements which are undertaken by the business. In case of a discontinuation the same will be done prospectively depending on the hedging relationship meeting the qualifying criteria.

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Accounting for Bonds under NZ IFRS 9 Financial Instruments

As per the IFRS 16, the leases of a business can be classified on the basis of operating leases and financial leases. As per the conditions which are stated in the business of BLFCL, the leases of the business should be classified as financial leases of the business (Weil, Schipper & Francis, 2013). Financial lease is a lease in which the risks are transferred to the lessee. In this type of leases, the risks are transferred from the lessor to lessee (Paik et al., 2015). The financial leases of the business can be shown appropriately in the financial statements of the business.

As per IFRS 8 Operating Segments, the information regarding the operating and other reporting segments of the business are to be disclosed in the notes to account section of the annual reports. IFRS 8 is applicable on individual or separate financial statements of entities whose debt and securities are traded in the public market and also the securities of the business are in the process of filing with a securities commission (Ibrahim, 2014). As per the provisions which are stated in the IFRS 8, Reportable segments of the business are considered to operating segments of the business if the following conditions are met which are:

  • Reportable Revenue of the business from both external customers and intersegment sales is 10% or more than combined revenue of all operating activities of the business.
  • The absolute value of profit or loss of the business is 10% or more than the combined profits or loss from the operating activities of the business.
  • The assets of the business are 10% or more than combined assets of all operating segments.

The operating segments of the business are recognized as per the standard od reporting of IFRS 8 and the management of the company needs to recognize the same and make appropriate disclosures for the same in the notes to account section of the annual reports (Graham, Harvey & Puri, 2015). The reporting segment of the business include the revenues of the business, assets of the business and also the profit or loss for the business during the period (Cereola, Nichols & Street, 2017). The operating segments and the criteria in which the operating segments of the business are selected for the purpose

Recognition of Operating Segments

The operating segments of the business is shown from the revenue of external customers which is shown to be more than 10% of the combined revenue and the same is to be reported by the business in the operating segments of the business. The management of the business needs to effectively disclose the assets of the business (Bradbury & Mear, 2017). The management of the company also needs to disclose the profits or loss of the business in the notes to account section of the annual reports of the business.

Reference

Bradbury, M. E., & Mear, K. M. (2017). Interpreting the Impact of IFRS Adoption. Australian Accounting Review, 27(2), 214-219.

Cereola, S. J., Nichols, N. B., & Street, D. L. (2017). Geographic segment disclosures under IFRS 8: Changes in materiality and fineness by European, Australian and New Zealand blue chip companies. Research in Accounting Regulation, 29(2), 119-128.

Chandra, P. (2017). Investment analysis and portfolio management. McGraw-Hill Education.

Dong, L., Kouvelis, P., & Su, P. (2014). Operational hedging strategies and competitive exposure to exchange rates. International Journal of Production Economics, 153, 215-229.

Graham, J. R., Harvey, C. R., & Puri, M. (2015). Capital allocation and delegation of decision-making authority within firms. Journal of Financial Economics, 115(3), 449-470.

Hull, J., Treepongkaruna, S., Colwell, D., Heaney, R., & Pitt, D. (2013). Fundamentals of futures and options markets. Pearson Higher Education AU.

Ibrahim, K. (2014). Firm characteristics and voluntary segments disclosure among the largest firms in Nigeria. International Journal of Trade, Economics and Finance, 5(4), 327.

Ju, N., Leland, H., & Senbet, L. W. (2014). Options, option repricing in managerial compensation: Their effects on corporate investment risk. Journal of Corporate Finance, 29, 628-643.

Kallsen, J., & Muhle?Karbe, J. (2015). Option pricing and hedging with small transaction costs. Mathematical Finance, 25(4), 702-723.

Paik, D. G. H., van der Laan Smith, J. A., Lee, B. B., & Yoon, S. W. (2015). The relation between accounting information in debt covenants and operating leases. Accounting Horizons, 29(4), 969-996.

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.