Account 343 - Bonds released

 

1.Accounting Principles

Account 343 is only applied to enterprises borrowing capital by the mode of releasing bond. This account is used to record situation of releasing bond, including convertible bond and payment situation for bond of enterprises. This account is also used for recording bonds discounts, premium when issuing bond, and allocation situation of discounts, premiums when determining borrowing costs charged to business and production costs or capitalized for every period.

Real interest rate (also called effective interest rate) is defined as follows:

It is interest rates for loans of commercial banks commonly applied in the market at the time of the transaction;

b) Where the interest rate cannot be determined in accordance with point a above, the real interest rate is the interest rate that enterprises may borrow under the form of issued debt instruments which must not be convertible into shares (bond issuance must not commonly converted or borrowed by conventional contract) in conditions of production, business which is going on normally.

Principles of common bonds (unconvertible bonds)

When enterprises borrow capital by releasing bond, three cases may occur:

- Releasing bond at par (released price equal to Bond par value): means releasing bond with the price complied with bond par value. This case often occurs when the market interest rate is equal to the nominal interest rate of bond released;

- Releasing bond at discount (released price less than Bond par value): means releasing bond with the price lower than bond par value, called discounts of bond. This case often occurs when market interest rate is higher than nominal interest rate of bond released;

- Releasing bond at premium (released price higher than Bond par value): means releasing bond with the price higher than bond par value. The difference between released Bond par values higher than price of bond called premium of bond. This case often occurs when market interest rate is lower than nominal interest rate of bond released;

b) Bond discount and premium are only incurred when enterprises borrow by the mode of releasing bond, and at the releasing time, there is a difference between market interest rate and nominal interest rate approved by the investors who buy bond. Bond discount and premium are determined and recorded immediately at the time of releasing bond. The difference between market interest rate and nominal interest rate after the time of leasing bond shall not influence on value of premiums or discounts recorded.

c) Enterprises using Account 3431 - Bonds often used to record the details of contents related to the bond released, including:

- Bond par value;

- Bond discount;

- Bond premium

Also monitor in detail according to issuance duration of bond.

d) Enterprises must monitor discounts and premiums for every type of bond released, and allocation situation of every discount and premium when determining borrowing costs charged to business and production costs or capitalized for every period, namely:

- Bond discount is allocated gradually to be charged into borrowing costs for every period during bond life;

- Bond premium is allocated gradually to reduce borrowing costs for every period during the bond life;

- In case of bonds‘ interest costs are qualified for capitalization, borrowing interests and the allocation of discounts or premiums capitalized in every period must not exceed actual borrowing interests incurred and the allocation of discounts or premiums in that period;

- The allocation of discounts or premiums may use the actual interest rate method or the straight line method:

According to the real interest rate method: Discounts or premiums allocated into each term calculated by the difference between borrowing interest costs payable for every term of interest payment (calculated by beginning book value of bond multiply (x) with rate of actual interest in the market) with amounts payable every term.

According to the straight line method: Discounts or premiums allocated equally during bond life.

e) In case of paying interest at maturity, periodically, enterprises must calculate bond interest‘s payable every term, to record it into business and production costs or capitalize it into value of unfinished assets

g) When making financial statement, in the liabilities of the balance sheet, the item of bond released shall be recorded on net basis (determining by bond value at par minus (-) bond discount are plus (+) Bond premium)

h) Cost of issuing bonds is gradually allocated in accordance with bond life under the straight line method or real interest rate method and recorded in the financial expense or capitalized. At the time of initial record, the cost of issuing bonds is recorded a decrease in par value of the bond. Periodically, accountants allocate cost for bond issuance by recording an increase in the par value and recording in financial expense or capitalization in accordance with the recording accrued interest of the bond.

Accounting principles of convertible bonds

Convertible bonds are bonds that may be converted into common shares of the same issuer under the conditions identified in the released plan. Enterprises issuing convertible bonds must carry out procedures and meet the conditions of the convertible bonds issuance under the provisions of law.

b) Enterprise (the issuer of convertible bonds) uses account 3432 - Convertible bonds to record the value of the principal of convertible bonds at the time of reporting. Enterprises must open detailed accounting books to keep track of each type of convertible bonds according to term, interest rate and par value.

c) Convertible bonds recorded on account 3432 are bonds that can be converted into a number of determined shares defined in the issuance plan. Bonds that may be converted into a number of undetermined shares at maturity (depending on the market value of the shares at maturity) are accounted for as common bonds.

d) Cost of issuing convertible bonds is gradually allocated in accordance with bond life under the straight line method or real interest rate method and recorded in the financial expense or capitalized. At the time of initial record, the cost of issuing convertible bonds is recorded reducing par value of the bond. Periodically, accountings allocate cost for bond issuance by recording increasing the par value recorded in financial expense or capitalized in accordance with the recording accrued interest of the bond.

e) At the time of initial record, when issuing convertible bonds, enterprises must calculate and determine separately value of the debt component (principal debt) and capital component of convertible bonds. Principal debt of convertible bonds is recorded a liabilities; component of capital (stock options) of convertible bonds is recorded an owner‘s equity. The valuation of the components of the convertible bond is carried out as follows:

- Valuation of the principal of convertible bonds at the time of release

At the time of initial record, the value of the principal of convertible bonds is determined by discounting the nominal value of future payments (including principal and interest of bonds) about the present value under interest rate of similar bonds in the market without the right to convert into shares and subtracting the cost of issuing convertible bonds. In case of failure to determine the interest rate of similar bonds, enterprises use common loan interest rates in the market at the time of the issuance of bonds to determine the present value of future payments.

Common loan interest rate in the market is loan interest rate used in the majority of transactions in the market.

Enterprises shall actively determine common loan interest rates in the market in the most accordance with characteristics of the production and trading of the enterprises in consistence with the provisions of the State Bank.

Example of valuation of the principal of convertible bonds at the time of release: On January 1, 2012, Thang Long joint-stock company issues 1 million of convertible bonds with par value of VND 10,000 in 3-year period, nominal interest rate is 10% / year, payment of interest is every year at the end of the year. Interest rate of unconvertible similar bonds is 15% / year. At maturity, each bond is convertible into one share. Knowing that the convertible bonds are issued to mobilize capital for normal production, business (interest is included in financial expense). Valuation of the principal of convertible bonds at the time of initial record is carried out (ignoring the cost of issuing bonds) as follows:

Unit: dong   nominal value of future liabilities		discount rate		Present value of future liabilities
First year:	1,000,000,000 (accrued interest)	x	[1/1.15]	=	869,565,000
Second year:	1,000,000,000 (accrued interest)	x	[1/1.15^2]	=	756.144.000

Third year:	1,000,000,000 (accrued interest)	x	[1/1.15^3]	=	657,516,000
Third year:	10,000,000,000 (accrued principal)	x	[1/1.15^3]	=	6,575,160,000     8,858,385,000
Total

According to this example, total amount collected from the bond issuance is 10,000,000,000d, in which the total present value of future payments including principal and interest of bonds is 8,858,385,000d. This value is defined as the value of the principal of convertible bonds at the time of initial recording and is recorded as liabilities from the issuance of convertible bonds.

- Valuation of capital component of convertible bonds (bond conversion option)

The value of the capital component of convertible bonds is defined as the difference between the total amounts collected from issuance of convertible bonds and the value of the debt component of the convertible bond at the time of release.

According to the above example, the value of the capital component of convertible bonds is defined as: 10,000,000,000 - 8,858,385,000 = 1,141,615 billion dong. The value of capital component of convertible bonds is recorded as stock options under the owner‘s equity.

g) After initial recording, accountants must adjust the value of the principal of converted bond as follows:

- Record an increase in the value of the principal of the bonds for issuance costs allocated periodically;

- Record an increase in the value of the principal of bonds for the difference between the payable bond interests calculated on the interest of the unconvertible similar bond or real interest rates higher than the payable interest calculated on nominal interest rate.

Example: Following the above example, the determination of financial expenses in the period and adjustment of the value of the principal of convertible bonds at the end of the period shall be as follows:

Unit Thousand dong Value of the

Financial expense

Accrued interest

Value adjusted to increase the

Value of the principal of

pictures

h) Upon maturity of convertible bonds:

- The value of stock options of convertible bonds recorded in owner‘s equity is transferred to be recorded as premium of share capital which does not depend on the bondholders who can exercise the option to convert into stock or not.

- If the bondholders do not exercise the option to convert bonds into stocks, enterprises must record a decrease in the principal of convertible bonds in proportion to the repaid amount of the bond.

- If the bondholders exercise the option to convert bonds into stocks, accountants must record a decrease in the principal of convertible bonds and record an increase in owner‘s capital in proportion to par value of stocks released additionally. The difference between the values of the principal of the convertible bonds which is higher than the value of stocks released additionally is recorded as share premium.

2.Structure and contents of account 343 - Bond released

a) Account 343 - “Bond released”, comprises 2 sub-accounts:

- Account 3431 - ―Common bond. This account comprises 3 sub-accounts:

Account 34311 - Bond par value

Account 34312 - Bond discount

Account 34313 - Bond premium

- Account 3423 ―Convertible bond‖

b) Structure and contents of account 3431 “Common bond”

Debit side:

- Payment at bond maturity;

- Bond discount incurred in period;

- Allocation of bond premium in period;

Credit side:

- Value of bond issued at par during period;

- Allocation of bond discount in period;

- Bond premium incurred in period.

Credit balance: Value of borrowing debt due to releasing bond at end of term.

c) Structure and contents of account 3432 “Convertible bond”

Debit side:

- Payment of principal at bond maturity if bondholders do not exercise the option to convert into stocks;

- Transfer of principal of bonds to record an increase in owner‘s equity if bondholders exercise the option to convert into stocks.

Credit side:

- Value of the principal of bonds recorded at the time of release

- Value adjusted to increase the principal of bonds during the period

Credit balance: Value of the principal of bonds at the time of report.

3.Method of accounting for several major transactions

Accounting for issuing common bond

a) Accounting for issuing bond at par value

- Recording sums received from bond released, record:

Dr 111, 112, etc. (Sums received from buying bond)

Cr 34311 - Bond par value

- If paying bond interests periodically, when interests payments are calculated into business and production costs or capitalized, record:

Dr 635 - Financial expenses (if calculated into financial expenses in period)

Dr 627, 241 (if capitalized)

Cr 111, 112... (Sums paid for bond interests in period)

- If bond interests payment are deferred (when bonds mature), every term, enterprises must calculate in advance borrowing interest costs payable in period in business and production costs, or capitalize, record:

Dr 635 - Financial expenses (if be calculated into financial expenses in period)

Dr 241, 627 (if capitalized into value of unfinished asset)

Cr 335 - Accrued expenses (accrued bond interest in period)

At the end of bond life, enterprises pay principal and interest bond for people buying bond, recorded:

Dr 335 - Accrued expenses payable (Total sums of bond interests)

Dr 3431 - Bond par value (principal)

Cr 111, 112...

- In case of prepaying bond interests at bond releasing, borrowing interest costs shall be recorded in Debit side of Account 242 (details of prepaid bond interests), after that, allocated gradually to cost objects:

When releasing bond, recorded:

Dr 111, 112, etc. (Total sums actually received)

Dr 242 - Prepaid expenses (details of prepaid bond interests)

Cr 34311 - Bond par value

Periodically, allocate borrowing interests costs in period, record:

Dr 635 - Financial expenses (if be calculated into financial expenses in period)

Dr 241, 627 (if capitalized into value of unfinished asset)

Cr 242 - Prepaid expenses (details of prepaid bond interests)) (sums of bond interests allocated in period)

- Expenses for bond releasing:

Expenses for bond releasing incurred, record:

Dr 34311 - Bond par value

Cr 111, 112...

Periodically, allocation of expense on bond issuance under the straight-line method or the real interest rate method, record:

Dr 635, 241, 627 (allocation of amount of expenses of issuing bonds in the period)

Cr 34311 - Bond par value

- Payment at bond maturity, record:

Dr 34311 - Bond par value

Cr 111, 112...

b) Accounting for issuing discount bond

- Recording sums actually received from bond releasing, record:

Dr 111, 112, etc (sum received from selling bond)

Dr 3432 - Bond discount (the difference between sums received from selling bond at price lower than par value)

Cr 34311 - Bond par value

- In case of periodical paying interests, when borrowing interest‘s payments are calculated into business and production costs or capitalize, record:

Dr 635 - Financial expenses (if calculated into financial expenses in period)

Dr 241, 627 (if capitalized into value of unfinished asset)

C r 111, 112... ... (sums paid for bond interests in period)

Cr 3432 - Bond discount (Allocation amount of bond discount every term)

- In case bond interest‘s payments are deferred (when bond mature):

Every term, enterprises must calculate payable borrowing interest costs in period, record:

Dr 635 - Financial expenses (if calculated into financial expenses in period)

Dr 241, 627 (if capitalized into value of unfinished asset)

Cr 335 - Accrued expenses (bond interests payable in period)

Cr 3432 - Bond discount (Allocation amount in period)

At end of bond life, enterprises must pay bonds‘ principal and interest for buyers of bonds, record:

Dr 335 - Accrued expenses (Total sums of bond interests)

Dr 34311 - Bond par value

Cr 111, 112...

- In case of prepaying bond interests at bond releasing, borrowing interest costs shall be recorded in Debit side of acc 242 (details of prepaid bond interests), after that, allocated gradually to cost objects:

When releasing bond, record:

Dr 111, 112, etc. (Total sums actually received)

Dr 3432 - Bond discount

Dr 242 - Prepaid expenses (sums of prepaid bond interests)

Cr 34311 - Bond par value

Periodically, allocating borrowing interests costs into business and production costs in period or capitalizing, record:

Dr 635 - Financial expenses (if calculated into financial expenses in period)

Dr 241, 627 (if capitalized into value of unfinished asset)

Cr 242 - prepaid expenses (sums of bond interests allocated in period)

Cr 3432 - Bond discount (Allocation amount of bond discount every term)

Paying bond at maturity, record:

Dr 34311 - Bond par value

Cr 111, 112...

c) Accounting for releasing bonds at premium

- Recording sums actually received from bond released:

Dr 111, 112...(sum received from selling bond)

Dr 3433 - Bond premium (the difference between sums received from selling bond at price higher than par value)

Cr 34311 - Bond par value

- In case of periodical paying interests:

When interest payments are calculated into business and production costs or capitalized, record:

Dr 635 - Financial expenses (if calculated into financial expenses in period)

Dr 241, 627 (if capitalized into value of unfinished asset)

C r 111, 112... ... (sums paid for bond interests in period)

Concurrently, allocating gradually bond premium to record a decrease in borrowing costs every term, record:

Dr 34313 - Bond premium (Gradual allocation amount of every term)

Cr 635, 241, 627

- In case of interests payments are deferred (at bond maturity), every term, and enterprises must record in advance borrowing interest costs payable in period.

When calculating borrowing interest costs for cost objects in period, record:

Dr 625, 241, 627

Cr 335 - Accrued expenses (bond interests payable in period)

Concurrently, allocating gradually bond premium to record a decrease in borrowing costs every term, recorded:

Dr 34313 - Bond premium

Cr 635, 241, 627

At end of bond life, enterprises must pay bonds‘ principal and interest for people having bonds, record:

Dr 335 - Accrued expenses (Total sums of bond interests)

Dr 34311 - Bond par value (principal)

Cr 111, 112...

- In case of prepaying bond interests at bond releasing, borrowing interest costs shall be recorded in the Debit side of acc 242 (details of prepaid bond interests), after that, allocated gradually to cost objects:

When releasing bond, record:

Dr 111, 112, ..(Total sums actually received)

Dr 242 - prepaid expenses (sums of prepaid bond interests)

Cr 34313 - Bond premium

Cr 34311 - Bond par value

Periodically, allocating borrowing interests costs for cost objects in period, record:

Dr 635 - Financial expenses (if calculated into financial expenses in period)

Dr 241, 627 (if capitalized into value of unfinished asset)

Cr 242 - Prepaid expenses (sums of bond interests allocated in period)

Concurrently, allocating gradually bond premium to record a decrease in borrowing costs every term, record:

Dr 34313 - Bond premium (allocation amount of bond premium of every term)

Cr 635, 241, 627

Accounting for issuing convertible bond

a) At the time of issuance, accountants determine the value of principal and stock options of convertible bonds by discounting the nominal value of future payments to present value, record:

Dr 111, 112 (total sum received from issuance of convertible bonds)

Cr 3432 - Convertible bonds (origin debt)

Cr 4113 - Bond conversion option (the difference between sum received and principal of convertible bonds).

b) Costs to issue bonds incurred gradually are allocated in accordance with bond terms:

- Expenses for bond releasing incurred, record:

Dr 3432- Convertible bond

Cr 111, 112, 338…

- Periodic allocation of cost to issue bonds into financial expense, record:

Dr 625, 241, 627

Cr 3432- Convertible bond

c) Periodically, accountants record financial expenses or capitalize for the bond interest payable under interest of a similar bond without conversion rights or under common loan interest rates in the market simultaneously adjust the value of the principal of convertible bonds, record:

Dr 635- Financial expense

Dr 241, 627 (if capitalized)

Cr 335 - Accrued expenses (interest of bonds payable in period under nominal interest rate)

Cr 3432 - Convertible bonds (the difference between the bond interest calculated according to real interest or equivalent bond interest without right to convert higher than the bond interest payable in the period under nominal interest)

d) At bond maturity, in case the bondholders do not exercise the option to convert bonds into stocks, enterprises must repay principal of bonds, record:

Dr 3432- Convertible bond

Cr 111, 112.

Concurrently, transfer value of stock options of convertible bonds to share premium, record:

Dr 4113 - Bond conversion option

Cr 4112- Share premium

e) At bond maturity, if bondholders exercise the option to convert bonds into stocks, accountants record a decrease in the principal of convertible bonds and record an increase owner‘s capital, record:

Dr 3432- Convertible bond

Cr 4111 - Capital contributed by owners (under par value)

Cr 4112 - Share premium (the difference between the value of additional shares issued at their par value and the value of the principal of convertible bonds).

Concurrently, transfer value of stock options of convertible bonds to share premium, record:

Dr 4113 - Bond conversion option

Cr 4112- Share premium

Source: Circular 200