Denomination and money received may vary
The borrower may receive less than the face amount of the obligation due to the terms of the issue and associated costs. In this case, future payments follow the agreed schedule. Therefore, the coupon payment and interest expense in accounting do not have to coincide. For analysis, it is necessary to distinguish between the resource originally received, the book value, cash payments and the repayment amount.
IFRS 9 provides for the measurement of certain financial liabilities at amortized cost, with specified exceptions. Definitions of the effective rate method and amortized cost are found in Appendix A. Source: **curr-stat-ifrs9-text**, paragraph 4.2.1 and Appendix A. The example below suggests the applicability of this approach; he does not claim that every obligation is always treated equally.
Two-year contract with a given effective rate
The fictitious borrower receives 90. After a year he pays 4, and at the end of the second year - 4 and the repayment amount. For an accurate training model, we will set the effective annual rate 10% and determine the last repayment amount from the movement of the liability. There are no additional costs, modifications or taxes. The effective rate here is notional, not the current market rate, nor is it an offer of financing.
The first interest expense is 90 × 0,10 = 9. After payment of 4, the balance sheet liability is 90 + 9 − 4 = 95. In the second year, the consumption is 95 × 0,10 = 9,5. Before the final payment the obligation reaches 104,5. After the cash payment 4, the repayment amount remains 100,5.
Present value check: first payment 4 and final total payment 104,5 with bet 10% gives 4 / 1,10 + 104,5 / 1,10² = 90. This returns the resulting 90. We specifically structured the contract in such a way as to avoid bet selection and show the logic of the method using fully reproducible numbers.
Why does the liability grow without a new loan?
In the first year, interest expense exceeds the cash coupon, and the difference increases the carrying amount. This is not necessarily about attracting new money. If you compare only the beginning and end of the debt, you might mistakenly call the increase new financing. For reconciliation, percentage increases, payments, new contracts and other movements are needed separately.
A common mistake is to recognize the entire final payment as an expense, including the return of the main obligation. Another is to consider the coupon as the full cost of using borrowed funds when the amount received differs from the repayment. In our model, total interest expense is 18,5; total payments in excess of the money received are also 18,5. Their equality is a control of a closed educational history, and not a guarantee of such a simple structure of a real release.
Balance sheet and contractual calendar
The table of future undiscounted payments may differ from the carrying balance. The first helps to understand the upcoming volume of money, the second reflects the estimate as of the date according to the applicable rules. The difference needs to be explained, not corrected by arbitrarily converting one sum to another. For liquidity, dates and the ability to pay exactly the agreed amounts are important.
IAS 32 focuses on the presentation of financial instruments, while recognition and measurement are covered by other standards, including IFRS 9. Source: **curr-stat-ias32**, About. So the question “is it debt or equity?” and the question “how much is debt measured by?” related, but not identical. The name of the bond alone is not enough to answer both.
Limitations of Applicability
A real contract may have variable payments, commissions, early repayment, a currency component, changes in conditions and other features. They require separate rules and calculations. This material does not determine the effective rate of a real issue or assess its attractiveness to an investor.
Continuation - [bonds](/guides/bonds/), [coupon and yield](/guides/coupon-versus-yield/) and [balance](/guides/balance-sheet/). It is the accounting history of the borrower's obligation that is studied here, and not the price or yield of the buyer's security.
Check both sides of the same timeline
It is useful for the borrower to post the money received, cash coupon, interest expense and balance by date. If the last amount is not explained, do not insert it as an arbitrary amendment. First, review the full set of contract payments and the original estimate. In a complex release, the gap may be due to components that a simple training model intentionally excludes.
The same contract for the investor creates a different analytical question: what price did he pay and what flow does he expect to receive. The borrower's notional effective rate cannot be carried forward to the yield of any subsequent purchaser of the bond. The transaction price on the secondary market, the time of purchase and additional costs may vary. This material remains on the debtor’s reporting side.
If the obligation is changed or paid off early, the previous schedule cannot be continued automatically. A real solution will require analysis of the relevant event according to the applicable rules. Keep the date of the change and the original terms in the history so as not to confuse the old model with the new contract. This makes the reconciliation repeatable and helps separate a normal percentage increase from a stand-alone financial event.