COMPARATIVE ANALYSIS CASE (Continued)
Using foreign debt to finance operations is subject to the risk of
FINANCIAL STATEMENT ANALYSIS CASE 1
COMMONWEALTH EDISON CO.
(a) Due to the markdown from 99.803 to 99.25, Commonwealth Edison
would record a slightly larger discount and, of course, receive and
(b) In the same Wall Street Journal article, the following explanation was
provided for Commonwealth Edison’s bond markdown and slow sale:
“Commonwealth had the misfortune to begin its giant
offering only hours before investor sentiment was soured
Other economic events that can and do affect the price of securities
issued are:
1. A change in the Federal Reserve’s lending rate.
2. A change in the bank prime rate.
FINANCIAL STATEMENT ANALYSIS CASE 1 (Continued)
Of course, noneconomic, political, or other world events can also affect
the day-to-day sale of securities.
The “recent rebound in industrial productivity” mentioned in the
FINANCIAL STATEMENT ANALYSIS CASE 2
Eurotec
(a) Answers will vary. The company may have decided to refinance in
order to free cash needed for some other purpose, to reduce current
cash needs, or to leave a credit line available for quick access.
(b) The investor probably enjoys a higher interest rate than that obtained
Bonds Payable ……………………………………………………….
Cash ……………………………………………………….
(c)
Cash [(€250,000,000 X 1.02) +
(€95,000,000 X .99)] ………………………………………………
349,050,000
Bonds Payable ……………………………………………….
349,050,000
Cash ……………………………………………………….
Bonds Payable ……………………………………………….
255,000,000
Cash ……………………………………………………….
Bonds Payable ……………………………………………….
FINANCIAL STATEMENT ANALYSIS CASE 2 (Continued)
(d) Answers will vary. One advantage would be that it is a bond whose
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ACCOUNTING
Bond calculations:
PV of bonds at issuance = (€1,500 X PVF10,6) + (€1,500 X 0.05 X PVF – OA10,6)
Sales
€2,922
Expenses:
Cost of goods sold
€1,900
Salaries and wages expense
Depreciation expense
Net income
Income statement calculations:
Cost of goods sold = €1,800 + €2,000 – €1,900 = €1,900
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
BUGANT, SA
STATEMENT OF FINANCIAL POSITION
DECEMBER 31
2020
2019
2020
2019
Assets
Equity
Plant and equip.
€2,000
€2,000
Share capital
€1,500
€1,500
Accumulated dep.
Retained earnings
Inventory
Liabilities
Cash
Bonds payable
liabilities
€4,082
€4,090
Statement of financial position calculations:
ANALYSIS
Debt-to–assets ratio:
2019: €1,426 ÷ €4,090 = 0.3487 or 34.87 percent of Bugant’s assets were
Times interest earned:
2019: (€550 + €169) ÷ €169 = 4.25
Less than half of Bugant’s financing comes from debt, which is relatively
low. In 2019, Bugant earned four-and-a-quarter times its interest expense.
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Note that interest expense in this problem is larger than the company’s
yearly cash interest payments. Cash payments for interest are €150 per
PRINCIPLES
One could argue that this represents a classic trade-off between relevance
and faithful representation. Many people think that the fair values of
companies’ assets and liabilities are relevant to making investing and
On the other hand, one might argue that fair values of debt are not really
relevant if the company will not pay off the debt early.
RESEARCH CASE
According to IFRS9:
(a) 5.1.1 Except for trade receivables within the scope of paragraph 5.1.3,
at initial recognition, an entity shall measure a financial asset or
(b) 3.3 Derecognition of financial liabilities
3.3.1 An entity shall remove a financial liability (or a part of a financial
3.3.2 An exchange between an existing borrower and lender of debt
instruments with substantially different terms shall be accounted for
3.3.3 The difference between the carrying amount of a financial
liability (or part of a financial liability) extinguished or transferred to
RESEARCH CASE (Continued)
B3.3.6 For the purpose of paragraph 3.3.2, the terms are substantially
different if the discounted present value of the cash flows under the
new terms, including any fees paid net of any fees received and
discounted using the original effective interest rate, is at least 10 per
GAAP CONCEPTS AND APPLICATION
GAAP14.1. Similarities are as follows:
• As indicated above, U.S. GAAP and IFRS have similar
liability definitions. Both also classify liabilities as current
and non-current.
• Much of the accounting for bonds and long-term notes is
liabilities for future losses.
Differences are as follows:
• Under U.S. GAAP, companies must classify a refinancing
as current only if it is completed before the financial
statements are issued. IFRS requires that the current
portion of long-term debt be classified as current unless an
agreement to refinance on a long-term basis is completed
before the reporting date.
GAAP CONCEPTS AND APPLICATION (Continued)
• U.S. GAAP uses the term troubled debt restructurings and
develops recognition rules related to this category. IFRS
generally assumes that all restructurings should be
considered extinguishments of debt.
GAAP14.2. (1) Cash …………………………………………………… 92,608
Discount on Bonds Payable ………………… 7,392
Bonds Payable ………………………………. 100,000
(2) Interest Expense ($92,608 X 11%) …………. 10,187
GAAP CONCEPTS AND APPLICATION (Continued)
GAAP14.3. As indicated in the Global Accounting Insights of Chapter 2,
the IASB and FASB are working on a conceptual framework
project, part of which will examine the definition of a liability.