Transactions in Financial Assets and Liabilities 237
securities is given by the periodic coupon payments.
If coupon payments are fi xed, accrued interest can be
calculated by allocating the coupon payment to the
relevant period using a daily compound formula.
Debt securities issued at a discount or premium
9.40 Debt securities issued at a discount (or pre-
mium), such as short-term bills of exchange and dis-
counted and zero-coupon bonds, are recorded at the
time of issue at the issue price.^11 Th e diff erence be-
tween the discounted issue price of such debt securi-
ties and their price at maturity (redemption price) is
treated as interest accruing over the life of the debt
security. For each reporting period, the holder of the
debt security should record a transaction for the re-
ceipt of interest revenue arising from the diff erence
between the issue and redemption prices and its re-
investment in an additional quantity of the debt secu-
rity. Th e issuer of the debt security records the accrual
of interest expense and an increase in its liability for
debt securities. For debt securities issued at a pre-
mium, the diff erence between the issue price and the
price at maturity should be amortized over the life of
the instrument, reducing (rather than increasing) the
amount of interest accruing in each period. On a cash
basis, interest resulting from the discount should be
recorded as an expense on redemption of the bond.
Interest resulting from a premium should be recorded
as a reduction in interest expense at the time of issue.
Index-linked debt securities
9.41 With an index-linked debt security,^12 an in-
dexation mechanism links the amount to be paid at
maturity or coupon payments (or both) to an indica-
tor agreed by the parties. Th e values of the indicators
are not known in advance. For debt securities with
indexation of the amount to be paid at maturity, these
amounts may be known only at the time of redemp-
tion. As a result, total interest fl ows before redemption
cannot be determined with certainty. To estimate the
change in the value of the debt security due to inter-
est accrued before the values of the reference indica-
tors are known, some proxy measures need to be used.
(^11) Th e issue price is the actual amount paid—that is, aft er the
discount has been subtracted or premium added.
(^12) It is possible for loans and other fi nancial instruments to be
index linked and the same transactions would be recorded.
In this regard, it is useful to distinguish the following
three arrangements:
- Indexation of coupon payments only with no in-
dexation of amount to be paid at maturity - Indexation of the amount to be paid at maturity
with no indexation of coupon payments - Indexation of both the amount to be paid at ma-
turity and coupon payments.
9.42 Th e principles describing the transactions for
these index-linked debt securities revolve around de-
termining the value of interest and are discussed in
paragraphs 6.75–6.78.
Debt securities with embedded derivatives.
9.43 For debt securities with embedded derivatives,^13
such as call, put, or equity conversion options, the re-
cording of accrued interest is the same as for securities
that do not have such features. For all periods leading
up to the exercise of the option, the interest accrued is
unaff ected by the presence of the option. When the em-
bedded option is exercised, the securities are redeemed
and the accrual of interest ceases.Loans (3204, 3214, 3224, 3304, 3314, 3324)
9.44 Th e terms of a loan contract frequently require
periodic payments for all interest expense accrued
since the previous periodic payment and a payment
covering a portion of the original amount borrowed.
On an accrual basis, interest accrues continuously
over the reporting period and should be added to the
principal; the payments of interest and principal are
transactions in fi nancial assets or liabilities (see para-
graph 6.64). On a cash basis, periodic interest and
principal payments are recorded as interest expense/
revenue and transactions in fi nancial assets or liabili-
ties, respectively, when cash payments are made—no
interest is accrued (see paragraph 6.65).
9.45 When goods are acquired under a fi nancial
lease, a change of economic ownership from the
lessor to the lessee is deemed to take place, even
though the leased goods remain legally the property
of the lessor. Th is change in economic ownership is(^13) As explained in paragraph 7.148, securities with an embedded
derivative are classifi ed entirely as debt securities. A separate
fi nancial derivate component is not recorded.