548 Accounting: Business Reporting for Decision Making
majority of its useful life, and are essentially just one of many forms of financing the use of assets. The
lessee party to a finance lease enjoys most of the benefits of ownership and is normally responsible for
maintenance and upkeep. Conversely, some leases may be classed as operating leases, which are con-
tractual agreements that are cancellable upon giving notice and tend to be of much shorter term than the
useful life of the asset. These include the sorts of agreements that you might enter for the hire of a car
for a two-week fly-drive holiday, the hire of a floor-sander or, indeed, the rental of a house.
Debt finance from the Australian market
Entities wanting to raise debt finance from the Australian market have corporate bonds, notes and deben-
tures to choose from as methods of finance. To a great extent, these securities are similar methods of
financing; the differences mainly lie in their historical roles. Essentially, borrowing entities issue bonds,
notes or debentures as proof that debts exist. After that, if the securities are traded, the security itself (the
physical piece of paper) or the proof of registration with issues, which is electronically recorded, merely
acts as proof of current ownership. Naturally, the owner of a bond at maturity is the entity that receives
the repayment of face value from the issuer.
Corporate bonds
Corporate bonds grew in popularity in Australia during the 1990s. Corporate bonds are bonds that
are issued by entities to raise funds in order to expand the business. Corporate bonds are unsecured,
so good credit ratings by the ratings agencies — Moody’s Investors Service and Standard & Poor’s —
are extremely important to potential issuers of bonds. This market has grown strongly in the last few
years. The Australian Securities Exchange (ASX) website, http://www.asx.com.au, has full details of corporate
bonds, product specifications, prospectus summaries and prices.
Debentures and unsecured notes
Debentures are issued by entities to raise debt funds. Debentures may be offered to the large insti-
tutional investors by way of a private issue, or they may be issued to the public after the full details
of the issue and the entity are given in the prospectus. Information of interest with regard to the issue
includes the total amount of the issue, the maturity dates (normally 1–10 years), redemption details,
interest rate offered (normally fixed), interest payment dates and the security that is being offered to
investors should the entity become insolvent.
Unsecured notes are also issued by financial institutions. These have similar characteristics to deben-
tures, except that they are unsecured. Because they are unsecured, they carry a higher coupon to com-
pensate investors for the higher risk. These unsecured notes normally take the form of a certificate issued
by the borrower, made out to the lender for the amount invested. Where issues are not traded, investors
must wait until maturity of each issue to be repaid their funds.
VALUE TO BUSINESS• Long-term debt finance is supplied to borrowers through financial institutions as intermediated
finance or directly by the debt markets.
• For long-term funding purposes, most financial institutions offer:- fixed-rate business loans
- variable-rate business loans
- instalment loans
- interest-only loans
- fully drawn advances
- lease finance.
• Entities wanting to raise debt finance from the Australian market may choose as the financing medium: - corporate bonds
- debentures and unsecured notes.