TOPIC 3

NON-CURRENT LIABILITIES
FINANCIAL INSTRUMENTS: PRESENTATION :
MFRS 132 - OBJECTIVES
 to establish principles for presenting financial
instruments as liabilities or equity and for
offsetting financial assets and financial liabilities.
 It applies to the classification of financial
instruments, from the perspective of the issuer,
 into financial assets, financial liabilities and
equity instruments;
 the classification of related interest, dividends,
losses and gains;
 the circumstances in which financial assets and
financial liabilities should be offset.
 The principles in this Standard complement
the principles for recognising and measuring
financial assets and financial liabilities in
MFRS 9 Financial Instruments.
 and for disclosing information about them in
MFRS 7 Financial Instruments:
Disclosures.
 REDEMPTION OF REDEEMABLE
PREFERENCE SHARES UNDER COMPANIES
ACT 2016
 Under the new Companies Act 2016, the provision relating
to the issuing of redeemable preference shares are
similar to companies Act 1965.
 These are provided in Section 72(6) and Section 72(3)
including the requirement of capital maintenance.
 Section 72(4) specifies that preference shares are
redeemable only if they are fully paid up.
 Methods of redemption:
 Out of profits
 Out of fresh issue of shares
 Out of capital of the company
EXAMPLE - REDEMPTION OF REDEEMABLE
PREFERENCE SHARES (COMPANIES ACT 2016) –
FRESH ISSUE OF SHARES
Below is the extract Statement of Financial Position of Prime Bhd as at 1 January
2017:
RM
Issued and paid up capital
20,000,000 ordinary shares of RM1 each 20,000,000
10,000,000 redeemable preference shares of RM1 each 10,000,000

Reserves

Retained profits 13,000,000

43,000,000

The preference shares were issued on 1 January 2017 at par value of RM1 and will be
redeemed on 31 December 2017 at RM1.20 per share. A fresh issue of 10,000,000
ordinary shares was made for the purpose of the redemption at RM1.10. The new
shares were fully subscribed and paid for by the end of the year.

Required:
1. Prepare journal entries to record the above transactions.
2. Extract statement of financial position after redemption
EXAMPLE - REDEMPTION OF REDEEMABLE
PREFERENCE SHARES (COMPANIES ACT 2016)
- FRESH ISSUE OF SHARES
Journal Entries – Issue of Ordinary Shares
Dr. Cash 11,000,000
Cr. Ordinary Shares 11,000,000

Journal Entries – Redemption of Redeemable

Preference Shares
1. Dr. Redeemable Preference Shares 12,000,000
Cr. Cash 12,000,000
EXAMPLE - REDEMPTION OF REDEEMABLE
PREFERENCE SHARES (COMPANIES ACT 2016)
- FRESH ISSUE OF SHARES
Extract statement of financial position after redemption:

Issued and paid up capital

30,000,000 ordinary shares of RM1 each 30,000,000
Redeemable preference share Nil

Reserves
Retained Profits 12,000,000

42,000,000
EXAMPLE - REDEMPTION OF REDEEMABLE PREFERENCE
SHARES (COMPANIES ACT 2016) - OUT OF PROFITS

Journal Entries – Reduced retained profits

Dr. Retained Profits 10,000,000
Cr. Capital Redemption Reserve 10,000,000

Journal Entries – Redemption of Redeemable Preference

Shares
1. Dr. Redeemable Preference Shares 10,000,000
Cr. Cash 10,000,000

2. Dr. Retained Profits 2,000,000

Cr. Cash 2,000,000
EXAMPLE - REDEMPTION OF REDEEMABLE PREFERENCE SHARES (COMPANIES ACT 1965)
- OUT OF PROFITS

Extract statement of financial position after redemption:

Issued and paid up capital

20,000,000 ordinary shares of RM1 each 20,000,000
Redeemable preference share Nil

Reserves
Capital Redemption Reserve 10,000,000
Retained Profits 1,000,000
31,000,000
 MFRS 132:

 Convertible or Redeemable Preference Shares with fixed

rate of dividend shall be presented as liability separately
from shareholders’ equity.
 Non-redeemable preference shares with fixed rate of
dividend are financial liabilities.
 Preference shares that are redeemable at the option
of the issuer but has fixed rate of dividends are
compound instruments. Preference shares that are
contractually redeemable at a specific date are
financial liabilities.
 Any dividends attributable shall be presented as an
expense in the Statement of Profit or Loss.
 PREFERENCE SHARES

Not all preference shares can be treated as equity.

Under MFRS 132, preference shares can only be treated
as equity if it meets the requirements of paragraph
16.
This means that:
 Non-redeemable preference shares with fixed rate
of dividend are financial liabilities.
 Non-redeemable preference shares where
dividends are not fixed are equity.
PREFERENCE SHARES THAT ARE
REDEEMABLE
 Preference shares that are redeemable at
the option of the issuer and has no fixed
rate of dividend are equity.
 Preference shares that are redeemable at
the option of the issuer but has fixed
rate of dividends are compound
instruments.
 Preference shares that are
contractually redeemable at a
specific date are financial liabilities.
PREFERENCE SHARES WITH MANDATORY
DIVIDEND PAYABLE AND MANDATORY
REDEMPTION
 If Preference shares are issued with mandatory
dividend payment and mandatory redemption,
the entire instrument is a financial liability.
 It should be measured at amortised cost using
the effective interest rate method.
 Dividend expense calculated using the effective
interest rate method is recognised in Statement
of profit or Loss.
 Cpt 14 –pg 528
PREFERENCE SHARES WITH MANDATORY
DIVIDEND PAYMENT BUT REDEMPTION IS AT THE
OPTION OF THE COMPANY
 According to MFRS 132, if the Preference
shares are issued with mandatory
dividend payment but redemption is
at the option of the company
(redemption is discretionary), this
class of preference shares is a
compound financial instrument with
a liability component and equity
component.
 ACCOUNTING FOR CORPORATE
BONDS
What is corporate bonds?
 A corporate bond or loan stock is a long term debts issued
by a company to raise fund.

 It has a contract of bond indenture/agreement which

specifies the followings:
1) obligation to pay a sum of money at a specified
maturity date, plus
2) periodic interest based on specified coupon interest rate

 Corporate bond is a long term debt and must be reflected

in the Statement of Financial Position

 It can be issued at par, discount and premium.

 MFRS 139
 Measurement on initial recognition – Bond should be
recognised at cost, which is the fair value of the
consideration received for it. Transaction costs are
included in the initial measurement,

 Subsequent measurement – An issuing entity should

measure all financial liabilities at the amortised cost
model.

 Gain or losses on financial liabilities not to be

remeasured to fair value. Gain or loss is recognised in
Statement of Profit or Loss through the amortisation
process and when the financial liabilities are
derecognised.
BOND ISSUED AND REDEEMED
AT PAR
Journal entries
Year 1
 To record proceeds from issuance of bonds.

Debit Cash a/c

Credit Bond/Secured loan stock a/c

Year 1 – Year of Redemption

 To recognise interest expenses paid on bond every year

Debit Bond interest expense a/c

Credit Cash a/c

Year of Redemption
 To record redemption of bond at maturity date

Debit Bond/Secured loan stock a/c

Credit Cash a/c
EXAMPLE
 A company issue a 10% RM10,000,000 bond
at its par value. The bond matures in five
years. The market interest rate is 10%.
 The net present value of the bond is
computed as follows:
BV = interest + redemption sum
BV =PVIFA(10%,5)1,000,000 + PVIF(10%,5)10,000,000
= 3.7908 x RM1,000,000 + 0.62092 x RM10,000,000
= RM3,790,800 + RM6,209,200
= RM10,000,000
SOLUTION
Journal entries
Year 1
 To record proceeds from issuance of bonds.

Debit Cash a/c 10,000,000

Credit Bond/Secured loan stock a/c 10,000,000

Year 1 – Year of Redemption

 To recognise interest expenses paid on bond every year
Debit Bond interest expense a/c 1,000,000
Credit Cash a/c 1,000,000

Year of Redemption
 To record redemption of bond at maturity date
Debit Bond a/c 10,000,000
Credit Cash a/c 10,000,000
BOND ISSUED AT DISCOUNT
Journal entries
Year 1
 To record proceeds from issuance of bonds.
Debit Cash a/c
Debit Discount on bond a/c
Credit Bond a/c/Secured Loan Stock

Year 1 to Year of redemption

 To record interest expense paid on bond every year
Debit Bond interest expense a/c
Credit Cash a/c

 To amortise discount on bond

Debit Bond interest expense a/c
Credit Discount on bond a/c

Year of Redemption
 To record redemption of bond at maturity date
Debit Bond a/c/Secured Loan Stock
Credit Cash a/c
 EXAMPLE
 A company issue a RM50,000,000 par value bond
with a coupon rate of 6%. The bond matures in five
years. The market interest rate is 10%.
 Discount on bond:

= RM50,000,000 – RM42,418,426
= RM7,581,574

Amortisation of discount based on straight line method

= RM7,581,574 / 5 years
= RM1,516,315

Interest paid = RM50,000,000 x 6% = 3,000,000

 BOND ISSUED AT PREMIUM
Journal entries
Year 1
 To record proceeds from issuance of bonds.
Debit Cash a/c
Credit Premium on bond a/c
Credit Bond a/c

Year 1 – Year of Redemption

 To recognise interest expenses paid on bond every year
Debit Bond interest expense a/c
Credit Cash a/c
 To amortise premium on bond
Debit Premium on bond a/c
Credit Bond interest expense a/c

Year of Redemption
 To record redemption of bond at maturity date
Debit Bond a/c
Credit Cash a/c
EXAMPLE
 A company issue a RM1,000,000 par value
bond with a coupon interest of 12%.. The
bond matures in five years. The market
interest rate is 10%.
 The present value of bond = RM1,075,816
 Premium on bond = RM1,075,816 –
RM1,000,000
= RM 75,816
 Interest paid = RM1,000,000 x 12% =
RM120,000
TRANSACTIONS COSTS OF BONDS ISSUE

 Issuance of bonds involves numerous costs such as:

 Legal and Accounting Expense;

 Administrative Expense of printing documents and prospectus;

 Underwriting fees

 The above costs can be:

 Treated as an expense; or

 Reduced the related bond liability for the costs incurred.

Method 1
Debit Issue of Bonds Expenses
Credit Profit or Loss
Method 2
Debit Deferred bond issue costs
Credit Bond a/c
Debit Interest expenses
Credit Deferred bond issue costs
ACCOUNTING FOR BANK LOANS AND
OTHER LONG TERM DEBTS
 For bank loan, the face value is equal to its
present value because banks quote/use market
rate/fair value for their loans.

Journal entries
 To record the receipt of loan

Debit Cash a/c

Credit Bank loan a/c
 To record bank loan interest
Debit Bank loan interest expenses a/c
Credit Cash or interest payable a/c
 EARLIER RETIREMENT OF DEBTS
 A long term debt such as bond or a term loan , may be
retired or extinguished earlier than its maturity date.
 To qualify for de-recognition,

the retirement/extinguishment must be a legal

discharge of financial liability.
 The earlier retirement of bond can be achieved by a
reacquisition or repurchase of the bonds in the open
market.
 The earlier retirement of loan or other long term
debts is accomplished by a payment directly to the
creditor/bank before the maturity date.