Question

Question: Under IFRS, bonds issuance costs, including the printing costs and legal fees associated with the issuance, should be:

1. expensed in the period when the debt is issued.
2. recorded as a reduction in the carrying value of bonds payable.
3. accumulated in a deferred charge account and amortized over the life of the bonds.

d.reported as an expense in the period the bonds mature or are redeemed.

Short answer

Answer

Option (b) is the correct option.

Step-by-step solution

Meaning of Bonds Issuance Costs

Bonds issuance costs are the expenses related to the issuance of bonds by an issuer to investors. Such costs can be accounted for by capitalizing them first and then charging them to expense over the duration of bonds.

Examples of bonds issuance costs comprise commissions, legal costs, printing costs, accounting costs, and registration fees.

Explanation for the correct option

Option (b) is correct because these costs are listed as a decrease in the bond obligation on the balance sheet. These costs are then charged to the expense over the duration of the relative bond with the help of the straight-line method.

Explanation for the incorrect options

Option (a) is incorrect because the bond issuance costs are charged as an expense over the full period, that is, from the date of issue of bonds to the date of maturity of the bond.

Option (c) is incorrect as, under the amortization method, a similar amount is charged to expense in each term over the duration of bonds.

Option (d) is incorrect as the bond’s issuance costs are capitalized first and then charged to expense over the duration of bonds. However, if the bond issuance costs are paid initially, then the leftover cost of issuance of bonds that were capitalized at that time is charged as an expense when the leftover bonds mature.