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CFA Level I · CFA Level I Exam · Topics in Long-Term Liabilities and Equity

A company incurs underwriting and legal fees when issuing bonds at par, and measures the bonds at amortized cost under IFRS. These issuance costs will most likely:

Issuance costs are deducted from the initial carrying amount of the bond liability and amortized over its life through interest expense using the effective interest method. This makes the effective interest rate higher than the stated coupon rate.

  1. Abe expensed in full in the period of issuance
  2. Bbe deducted from the initial carrying amount of the liability and amortized through interest expenseCorrect
  3. Cbe recorded as an equity reduction and never amortized

Explanation

Under IFRS, transaction costs for liabilities at amortized cost reduce the initial carrying amount. They are then spread over the term via the effective interest rate, which raises the effective rate above the coupon rate.

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