How to treat discounted loan stock?
A company proposes to issue 6% loan stock of nominal value £6m. This is to fund a project which will not start to generate any revenue until 12+ months down the line, so it is pointless paying interest in Year 1, as this would simply have the effect of turning capital into taxable income, which would not help anyone except HMRC.
The solution chosen is to issue the stock at a 6% discount, and accrue / pay interest only from the start of Year 2, but this raises a question:
As the liability will be to repay the full £6m, presumably this figure should be shown in the Balance Sheet, but how should the discount be reported in the Financial Statements?
Of course there may be tax implications as well, but I will think those through separately.
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