Treatment of Loss on Issue of Debentures

Debentures are a common means for companies to raise long-term finance. When debentures are issued, they may be issued at par, at a premium, or at a discount. However, in certain cases, even if a company receives full or more than full face value, it might still face a loss on issue. This loss is often due to the terms of redemption, where a company promises to repay more than what it originally receives, usually to make the debenture offer more attractive to investors.

What is Loss on Issue of Debentures?

Loss on Issue of Debentures occurs when the amount repayable on redemption is more than the amount received on issue. This difference creates a capital loss for the company. It is not a trading loss but is amortized over a period—usually over the life of the debenture.

Example:

If a debenture with a face value of ₹100 is issued at ₹95 (i.e., at a discount of ₹5), and it is to be redeemed at ₹105 (i.e., at a premium of ₹5), then:

• Discount on issue = ₹5

• Premium on redemption = ₹5

• Total loss on issue = ₹10

Components Causing Loss on Issue of Debentures

1. Discount on Issue of Debentures:
   When debentures are issued at a price lower than their face value.

2. Premium on Redemption of Debentures:
   When the company agrees to pay more than the face value at the time of redemption.

3. Combination of Both:
   The loss is higher if debentures are issued at a discount and redeemed at a premium.

Accounting Treatment:

The total loss on the issue of debentures is treated as a fictitious asset and is amortized over the lifetime of the debentures. It appears on the assets side of the balance sheet under the head “Miscellaneous Expenditure” or as “Other Non-Current Assets” (Ind AS format).

Journal Entries

Let’s take an example to show journal entries for a ₹1,00,000 debenture issued at 95% and redeemable at 105%.

1. At the time of issue:

(Being issue of debentures at 95% and redeemable at 105%)

2. For amortization of loss annually (assuming 5 years):

(Being 1/5th of loss amortized in profit & loss)

This entry is repeated annually until the entire loss is written off.

Presentation in Balance Sheet (Format):

Under the Companies Act, 2013 (Schedule III), loss on issue of debentures is shown as:

Assets Side → Non-current Assets → Other Non-Current Assets → Miscellaneous Expenditure (to the extent not written off or adjusted)

Example:

Other Non-Current Assets:

• Loss on issue of debentures: ₹8,000

(assuming ₹2,000 has been written off in the first year from ₹10,000 total)

Tax Implications

Loss on issue of debentures is treated as a deferred revenue expenditure for income tax purposes. The amortized portion is allowed as a deductible expense for each year over the life of the debenture. This provides some tax relief to the company annually.

Alternative Approach: Writing Off in the Year of Issue:

Some companies prefer to write off the entire loss on issue of debentures in the year of issue itself, especially if the amount is not material or if the company has sufficient profits. In such a case, the entry would be:

Points to Remember:

• Loss on issue of debentures is a capital loss, not a trading or operational loss.

• It should be amortized over the life of the debentures if not written off in the year of issue.

• Must be disclosed appropriately in the notes to accounts in financial statements.

• Must follow the relevant accounting standards (AS-16 or Ind AS 109 for financial instruments, where applicable).

• Premium payable on redemption is a liability and is credited to a separate account at the time of issue.