Debenture redemption at par

When redeeming debentures at par using the Effective Interest Rate (EIR) method, the accounting treatment focuses on the amortized cost of the liability.

Key Accounting Principles

Under the EIR method (as per Ind AS 109 or similar accounting standards):

• Transaction Costs: Costs incurred to issue debentures (like the 50,000 INR in your example) are not treated as immediate expenses. Instead, they are deducted from the proceeds of the debenture issue, reducing the initial carrying amount of the liability.

• Initial Carrying Amount: The debentures would be recorded at 4.5 lakhs (5 lakhs face value minus 50,000 transaction costs).

• Effective Interest Rate (EIR): The EIR is the rate that exactly discounts the expected future cash payments (interest and principal) to the net carrying amount (4.5 lakhs).

• Amortization: Over the life of the debentures, the carrying amount is systematically increased from 4.5 lakhs back up to the face value of 5 lakhs. This is done by charging interest expense to the P&L at the EIR, while the actual cash coupon paid is lower. The difference between the EIR interest expense and the cash coupon is added to the carrying amount of the debentures.

The Value at Redemption

At the end of the last year, just before the final payment is made, the amortized cost (carrying balance) of the debentures will be exactly 5 lakhs.

The redemption at par means the company pays the holders the face value of 5 lakhs. Since the EIR method has successfully amortized the transaction costs over the life of the instrument, the liability balance in the books will perfectly match the cash outflow required for redemption.

Summary: When redeeming debentures at par using the EIR method, the carrying balance of the debentures will increase over time from the initial amount (Face Value minus transaction costs) to equal the Face Value (5 lakhs) by the end of the final year, which is then fully settled upon redemption.