Learning objectives
By the end of the week you can:
- Price a bond from its coupon and market yield, state whether it issues at par, discount, or premium, and build a complete effective-interest amortization schedule (including the effect of issuance fees) from a blank sheet.
- Explain why a lease is borrowing, compute a lease liability and right-of-use asset, and produce year-by-year income-statement effects under IFRS 16 / Ind AS 116 and under both ASC 842 models.
- Quantify the EBITDA, EBIT, margin, cash-flow, and leverage differences between an IFRS/Ind AS reporter and a US GAAP operating-lease reporter for the same lease, and apply the EBITDAR fix.
- Decide, for a given uncertain obligation, whether IAS 37 / Ind AS 37 and ASC 450 require a provision, a disclosure, or nothing, and compute the measurement under each, including where they give different numbers from identical facts.
- Read an Indian contingent-liabilities note the way an analyst does: size it against net worth and identify the disputed-tax pipeline.
- Build a deferred tax liability and a deferred tax asset from first principles, explain the valuation-allowance judgment, and read an effective-tax-rate reconciliation note line by line.
- Locate and interpret the borrowings note, current maturities, lease note, provisions roll-forward, and tax note in a real 10-K and a real Indian annual report.
Prerequisites & connections
Builds on. M1.01 (journal entries: everything here is drilled as debits and credits), M1.03 (current vs non-current classification), M1.04 (where interest, lease payments, and taxes land in the cash-flow statement), M1.05 (the linkage: new liabilities create new paths between statements), M1.07 (depreciation mechanics, reused by the ROU asset; the discounting habit).
Feeds forward. M1.09 reuses the present-value machinery for pensions and financial instruments. M1.10's hand-spread requires every note taught here. Phase 2 turns this into judgment: leverage and coverage ratios (M2.02), the provisions roll-forward as a shenanigan detector (M2.06), cash-tax vs book-tax divergence (M2.07). Phase 3 needs effective interest for cost of debt and lease-adjusted capital for ROIC and WACC. Phase 5's airline, hotel, retail, and NBFC playbooks stand on the lease and borrowing mechanics here.
4.0 The financing story on one page
Flip any balance sheet. The left side says what the business owns; the right side says who has claims on it and in what order. Lenders and lessors hold contractual claims: fixed amounts on fixed dates, senior to shareholders. Tax authorities hold statutory claims. Courts may create claims out of past conduct. Equity gets what is left. An analyst reads liabilities with one organizing question: how big is the claim, when is it due, and how certain is it? Debt is dated and certain. Leases are dated and certain, but were hidden for decades. Provisions are estimates. Contingent liabilities are possibilities. Deferred taxes are timing. This week walks that spectrum from most certain to least, exactly the order in which claims kill companies.
4.1 Debt at amortized cost: the effective-interest method
Intuition before mechanics. A bond is a package of promised cash flows: periodic coupons plus face value at maturity. The coupon rate is written into the contract and never changes. The market yield is the return lenders demand today for this borrower's risk. Price is just present value:
Issue price = PV of all coupons + PV of face value, discounted at the market yield
Three cases follow immediately:
- Coupon = yield → promised cash flows are exactly what the market demands → issue at par.
- Coupon < yield → stingy coupons → lenders pay less than face to make up the return → discount.
- Coupon > yield → generous coupons → lenders pay more than face → premium.
The one rule that runs everything. After issuance:
Interest expense = opening carrying amount × effective interest rate
where the effective rate is the market yield at issuance, locked for the instrument's life (the market moves afterward; your books don't care: you borrowed at that price). The cash coupon is fixed by contract. The difference between expense and coupon adjusts the carrying amount, which walks toward face value and arrives exactly at maturity: the pull to par. US GAAP (ASC 835), IFRS 9, and Ind AS 109 all use this method; it is one of the rare fully converged areas.