Non-current liabilities: bonds at amortized cost and deferred taxes

What is in non-current liabilities?

Everything the company must settle more than a year out, and the main financial items are loans and bonds. Deferred tax liabilities also sit here.

Long-term financial liabilities are borrowings from banks, and notes and bonds issued to investors. Leases and post-employment obligations are also non-current liabilities, taken up in the long-term liabilities and equity module. The notes disclose interest rates, maturities, covenants and fair values.

Non-current liabilities

• Loans, notes and bonds payable Memorize usually amortized cost
  • At par face value throughout
  • At a discount carrying amount rises to face; expense above coupon
  • At a premium carrying amount falls to face; expense below coupon
• At fair value Use it trading liabilities, derivative liabilities, fair value option
• Deferred tax liabilities Memorize tax payable later on a temporary difference
• Leases, pensions covered in long-term liabilities and equity

How are bonds payable reported?

Bonds payable are reported at amortized cost : the amount received at issue, adjusted as any discount or premium is amortized, so that the carrying amount equals face value at maturity.

Memorize

A bond issued at par is carried at face value throughout. A bond discount arises when the bond is sold below face value, which happens when the market rate is above the coupon rate. The company records the proceeds, and the carrying amount climbs to face value. A bond premium is the opposite, when the coupon is above the market rate.

The company uses the effective interest method : interest expense each period is the opening carrying amount times the market rate at issue. For a discount bond that is more than the coupon; the extra is not paid in cash, it is added to the carrying amount.

$$B_0 = \sum_{k=1}^{N}\frac{cF}{(1+y)^k} + \frac{F}{(1+y)^N}$$

$$IE_t = B_{t-1} \times y$$

$$B_t = B_{t-1} + IE_t - cF$$

Exam items turn this around: the price, the first-year expense or the carrying amount can be what you solve for.

A change in the market value of a bond carried at amortized cost does not appear in the statements. The notes show the fair value instead.

A few liabilities are at fair value: those held for trading, derivative liabilities and any liability the company elects to measure that way under the fair value option .

Exam tip Discount, then up. Premium, then down. Always toward face value.

Go deeper Cash flow versus expense on a discount bond

The coupon is the cash interest. The extra interest expense (56.79 − 40 = 16.79 in year 1) is non-cash: it increases the carrying amount, and the full discount of 53.46 is paid at maturity as part of the face value. So cash paid out over the life is the coupons plus the face value, while expense recognized is larger year by year until the discount is used up. Early retirement of debt gives a gain or loss equal to the carrying amount minus the price paid, which is beyond the 2026 outcomes.

What is a deferred tax liability?

A deferred tax liability is tax the company expects to pay in future periods because of a taxable temporary difference. It arises when taxable income, and so tax payable, is lower than accounting profit and the income tax expense based on it.

Memorize

The usual cause is depreciating an asset faster for tax than in the accounts. The deduction arrives earlier for tax, so tax paid today is lower, but the difference reverses and tax catches up.

$$DTL = \text{taxable temporary difference} \times t$$

Compare the opposite case: cash received from customers before the revenue is earned, and taxed when received, makes taxable income higher now. That is a deferred tax asset (a kind of prepaid tax). The income taxes module covers both in full.

Go deeper Other sources of deferred tax liabilities

Besides faster tax depreciation, a deferred tax liability can arise when a subsidiary’s profits have not been distributed and so are not yet taxed. Fines that are never deductible are permanent differences, which create no deferred tax at all.