Debt instrument

A debt instrument is a paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with terms of a contract. Types of debt instruments include notes, bonds, debentures, certificates, mortgages, leases or other agreements between a lender and a borrower.

These instruments provide a way for market participants to easily transfer the ownership of debt obligations from one party to another.

The creditor is in the reception of a fixed amount of interest along with repayment of the principal amount during the lifetime of the instrument. It is just the resemblance of IOU (I Owe You) in the midst of the issuer and the purchaser, according to the debt consolidation companies.


Imperativeness of a Debt InstrumentAfbeeldingsresultaat voor Donald duck lending money from Dagobert GIF

Debt Repayment becomes enforceable legally
Obligation transfer-ability is enhanced.

Classification of Debt Instruments

– Long-term Debt Instruments

These are paid over a year or more and are being reimbursed in the course of monthly instalment disbursements, to illustrate – long-term loans or mortgages.

– Short-term Debt Instruments

These may be either personal or corporate, are in anticipation of reimbursement within one year, to illustrate – bills of the credit cards, payday loans, or treasury notes.

Examples of the Common Debt Instruments

  • Treasury Bills: These are obligations of the short term basis issued for less than one year. These can be at redemption just at maturity. These are on the issue towards meeting short-term mismatches in expenditures and receipts. Longer maturity bonds are known as dated securities.
  • Debentures: There is no asset backing in debentures. Mostly these are in the issue by the company as a source of raising medium or short-term capital for funding specific projects. The money of the creditors’ is in anticipation of being reimbursed with the generated revenue by the project.
  • Mortgage: This has reference to a loan in opposition to a residential property. An associated property secures this loan. The unsuccessful disbursement property can be confiscated and sold for the recovery of the loaned amount.
  • Bonds: Bonds are on the issuance by the government, central bank or businesses. Backed by the issuing entity’s assets. If bonds are issued by a company for raising debt capital thereafter, insolvency is declared, the bondholders are entitled to the reimbursement of their investments from the assets of the company.
Something else -   Interest-free demand loan No bank debt

Diversities between Bonds and Stocks

Bonds

  1. Bondholders are the creditors to the company. They are the lenders.
  2. Bonds usually have a defined term, or maturity after which it becomes redeemable.

Stocks

  1. Stockholders have the equity stake in the company. They are the owners.
  2. Stocks are indefinitely outstanding.

Classification and measurement IFRS 9

Guide: Look at the colours to jump through the decision blocks, use the links to get informed on IFRS data or follow this written decision tree:

  1. The financial instrument to be classified (and thus measured) is a debit instrument (see above explanations)
  2. The overall business test provides three choices:
    1. Business model – Hold to collect and sell,
    2. Business model – Hold to collect.
    3. Other business models (neither 1 or 2)
  3. Business model – Hold to collect and sell:
    1. Passing the SPPI test (red box YES)
    2. Failing the SPPI test (red box NO)
  4. Business model – Hold to collect:
    1. Passing the SPPI test (orange box YES)
    2. Failing the SPPI test (orange box NO)
  5. Other business models > classification and measurement category in IFRS 9 – Fair value through profit or loss
  6. Business model – Hold to collect and sell – Passing the SPPI test (red box YES) – go to 10 Fair value designation/Fair value option
  7. Business model – Hold to collect and sell – Failing the SPPI test (red box No) > classification and measurement category in IFRS 9 – Fair value through profit or loss
  8. Business model – Hold to collect – Passing the SPPI test (orange box YES) – go to 10 Fair value designation/Fair value option
  9. Business model – Hold to collect – Failing the SPPI test (orange box NO) > classification and measurement category in IFRS 9 – Fair value through profit or loss
  10. Apply fair value designation/Fair value option:
    1. Business model – Hold to collect and sell – Designate the debt instrument as fair value through profit or loss?
      1. red box Yes > classification and measurement category in IFRS 9 – Designated fair value through profit or loss,
      2. red box No  > classification and measurement category in IFRS 9 – Fair value through other comprehensive income (with recycling)
    2. Business model – Hold to collect – Designate the debt instrument as fair value through profit or loss?
      1. orange box Yes > classification and measurement category in IFRS 9 – Designated fair value through profit or loss,
      2. orange box No  > classification and measurement category in IFRS 9 – Amortised costs
Something else -   Events after the reporting date

Debt instrument

(Overall) Business model test

Business model

Hold to collect and sell

Business model

Hold to collect

Other business models

Solely Payments of Principal and Interest test

YES

YES

NO

NO

Fair value designation

Fair value through profit or loss

NO

NO

YES

YES

Fair value through other comprehensive income

(with recycling)

Amortised costs

Designated fair value through profit or loss

Debt instrument Debt instrument Debt instrument

Debt instrument    Debt instrument

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

Something else -   Events after the reporting date

Debt instrument Debt instrument Debt instrument Debt instrument Debt instrument Debt instrument

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