CFM80190 - Old rules: loan relationships: authorised accounting methods: accruals basis: market discount

Allocating payments: accruing market discount

This guidance applies to periods of account beginning before 1 January 2005

A company acquires a security at a market discount when it buys a security on the market (rather than on issue) for less than its redemption value. A company security with a low rate of interest may be sold for less than its redemption value. »Ê¹ÚÌåÓýapp difference between

  • the amount paid for the security on the market (i.e. its cost), and
  • the redemption value

is called the market discount.

Borrower

»Ê¹ÚÌåÓýapp sale of a security at a discount does not affect the borrower. After the sale, the debtor company continues to owe the same amount, payable at the same time but to a different lender. »Ê¹ÚÌåÓýapp fact that the new lender paid less for the security than the old lender is of no concern to the borrower when drawing up its accounts.

Lender

»Ê¹ÚÌåÓýapp creditor will accrue the market discount on an economic accruals basis in the same way as it would accrue an issue discount.