CFM92420 - Debt Cap: the available amount: amortising discount and premium

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

What financing expenses are included in the available amount?

Amortisation of discounts/premiums relating to borrowing

Where a group has recognised a financial liability in respect of borrowing in its consolidated accounts, it will initially recognise this at its fair value. This is the value that a person would have to pay an independent third party to release a debt liability.

After initial recognition, the group will typically account for the liability using the amortised cost basis in future periods (IAS 39 or IFRS 9; FRS 26 in ‘Old UK GAAP’ or FRS 102 in ‘New UK GAAP’). Under amortised cost, the borrower will - over the life of the loan - debit to the income statement (or profit and loss account) any difference between the value of the liability on initial recognition, and the amount that the group expects to repay on maturity.

Such a difference may come about because the group has issued debt at a discount - for example, it may have issued securities with a face value of £100 million for £85 million. Alternatively, borrowing may be repayable at a premium - on maturity of a security, the holder receives an amount in excess of the face value. In either case, the discount or premium represents a reward to the lender in addition to, or instead of, interest.

Where a debt security carries interest, as well as being issued at a discount or redeemable at a premium, the expense debited to the profit and loss account or income statement will include both amortisation of the premium or discount, and the interest, together with any associated fees or similar costs, all computed according to an effective interest rate method (see CFM21650). There is no need, in practice, for a group to distinguish between these elements when computing the available amount, provided they all fall within S332(1).

Here again, where the amortised discount or premium is payable by one group member to another then both are consolidated within the group’s financial statements and will not form part of the available amount.