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The following guidance covers Old UK GAAP (applied before 2015) where FRS 26 was not applied.

Accounting for discounted securities

A discounted security is one acquired at a discount to its face value. The same accounting applies to a security issued at face value and redeemable at a premium (or any combination of discount/premium on acquisition and discount/premium on redemption). The return to the lender comprises the interest received on the bond plus the difference between the purchase price and the redemption price.

Example

On 1 January 2008 Company A lends 拢800,000 in return for a 拢1M bond in Company J. The bond pays interest at 2%. The bond is redeemable in 5 years (31 December 2012) for 拢1M.

This means that the total return to Company A as lender is the 拢200,000 increase in the value of the bond together with five year鈥檚 interest of 拢20,000 per annum. This is the equivalent of a fixed rate loan of 拢800,000 with an interest rate of 6.9%. (This is based on the assumption that all but 拢20,000 of the interest each year is rolled up into the balance outstanding).

The accounting is set out below:

In the year ended 31 December 2008, the bookkeeping would be:

-	Debit	Credit
On 1 January 2008	-	-
Loan to Company J	拢800,000	-
Cash at Bank	-	拢800,000
On 31 December 2008	-	-
Loan to Company J	拢55,200	-
Finance Income (in P&L)	-	拢55,200
Cash at Bank	拢20,000	-
Loan to Company J	-	拢20,000

The finance income of 拢55,200 amounts to 6.9% of the opening balance on the bond of 拢800,000.

As at 31 December 2008, the balance on the loan due from Company J will have increased to 拢835,200 (being the 拢800,000 balance at the beginning of the year plus finance income receivable of 拢55,200 less finance income received of 拢20,000).

In the following accounting period (31 December 2009) Company A will record finance income of 拢57,600. This represents 6.9% of the opening carrying value of the loan of 拢835,200.

The bookkeeping in this accounting period would be:

-	Debit	Credit
On 31 December 2009	听	听
Loan to Company J	拢57,600	-
Finance Income (in P&L)	-	拢57,600
Cash at Bank	拢20,000	-
Loan to Company J	-	拢20,000

As at 31 December 2009, the balance on the loan to Company J will amount to 拢872,800 (being opening balance 拢835,200 loan plus finance income receivable of 拢55,600 less finance income received of 拢20,000).

In the subsequent accounting periods, the balance on the loan to Company J will increase, so that as at 31 December 2012 immediately before the loan is repaid and interest for 2012 is paid, the balance will be 拢1,020,000, being 拢1M due from Company J plus the 2% interest due in 2012:

Year	Opening	Finance Income	Finance Income	Loan	Closing
-	Balance	At 6.9%	Received	Repayment	Balance
-	拢	拢	拢	拢	拢
2008	800,000	55,200	(20,000)	-	835,200
2009	835,200	57,600	(20,000)	-	872,800
2010	872,800	60,200	(20,000)	-	913,000
2011	913,000	63,000	(20,000)	-	956,000
2012	956,000	64,000	(20,000)	1,000,000	-