Last reviewed: July 2026.
A debenture is a form of long-term borrowing issued by a company. Depending on the legal terms and jurisdiction, it may be secured or unsecured, redeemable on a fixed date, convertible into shares or subject to other conditions. Accounting follows the contractual substance of the instrument rather than its label.
What a debenture represents
For the issuer, an ordinary debenture usually creates a contractual obligation to pay interest and repay principal. That obligation is normally a financial liability. For the investor, it is generally a financial asset. The instrument’s prospectus or loan agreement determines cash flows, security, covenants, conversion rights and redemption terms.
Older accounting notes often treat every debenture as a simple loan at face value. Modern reporting may require fair-value measurement, effective-interest calculations, separation of compound instruments and detailed disclosures.
Liability or equity under IAS 32
IAS 32 focuses on whether the issuer has a contractual obligation to deliver cash or another financial asset. A mandatory cash repayment normally supports liability classification. An instrument settled in the issuer’s own shares requires analysis of the settlement terms, including whether a fixed amount is exchanged for a fixed number of shares.
Classification matters because interest on a liability is generally an expense, while distributions on an equity instrument are treated as distributions to owners. The legal name “debenture” does not override the contractual rights and obligations.
Initial recognition and issue costs
Under IFRS 9, a financial liability is initially measured at fair value. For liabilities not measured at fair value through profit or loss, directly attributable transaction costs are included in the initial carrying amount. An issue at a discount, premium or with significant fees therefore affects the effective interest rate.
| Example | Amount |
|---|---|
| Cash proceeds | $970,000 |
| Face value repayable | $1,000,000 |
| Direct issue costs | $10,000 |
| Initial amortised-cost liability | $960,000 |
The difference between initial carrying amount and the final redemption amount is spread through finance cost using the effective interest method.
Subsequent measurement and effective interest
Most ordinary debenture liabilities are subsequently measured at amortised cost. Finance cost is calculated by applying the effective interest rate to the opening carrying amount. Cash coupon payments reduce the liability after the finance cost is recognised, so the carrying amount gradually moves toward the amount payable on redemption.
The effective rate captures coupons, discounts, premiums and qualifying transaction costs. Using only the coupon rate can understate or overstate finance cost when the issue price differs from the redemption amount.
Convertible debentures
A convertible debenture may be a compound financial instrument if it contains both a liability component and an equity conversion option. At issue, the liability component is measured first, commonly by discounting contractual cash flows at the market rate for similar non-convertible debt. The residual is recognised in equity.
The liability is then measured using effective interest. The equity component is generally not remeasured. Conversion, early redemption or modification requires careful application of the relevant financial-instrument requirements.
Interest, accruals and journal entries
| Transaction | Debit | Credit |
|---|---|---|
| Issue for cash | Cash | Debenture liability |
| Periodic effective interest | Finance cost | Debenture liability |
| Coupon payment | Debenture liability | Cash |
| Redemption | Debenture liability | Cash |
When interest is unpaid at the reporting date, the entity recognises the accrued finance cost in accordance with the instrument’s effective-interest calculation. The balance may be included in the liability carrying amount or shown consistently with the entity’s presentation policy.
Current versus non-current presentation
Classification depends on the right to defer settlement at the reporting date under the applicable presentation requirements. A debenture due within the operating cycle or within twelve months may be current unless the entity has a qualifying right to defer settlement. Covenant terms and breaches should be assessed using the requirements effective for the reporting period.
Refinancing intentions alone do not necessarily change classification. Review the contract, reporting-date rights and any events after the reporting period.
Redemption, modification and derecognition
On normal redemption, the carrying amount is removed and cash paid. If terms are substantially modified or debt is exchanged, the old liability may be derecognised and a new liability recognised. A gain or loss can arise from the difference between the old carrying amount and the consideration for extinguishment.
Early redemption, fees paid to lenders and conversions should be supported by legal documentation and a calculation approved independently of the journal preparer.
Disclosures and controls
- Reconcile face value, carrying amount and accrued interest to the debt register.
- Track security, maturity dates, coupons, covenants and conversion terms.
- Use an effective-interest schedule reviewed at issue and each reporting date.
- Confirm lender balances and investigate differences.
- Present accounting policies, liquidity risk and material terms clearly.
Debt accounting should connect the contract, treasury records, bank payments, general ledger and financial-statement disclosures.
Related accounting guides
Authoritative references
- IFRS Foundation: IAS 32 Financial Instruments—Presentation
- IFRS Foundation: IFRS 9 Financial Instruments
Practical takeaway
Account for a debenture from its contractual terms: classify liability and equity components, measure the initial proceeds and issue costs correctly, apply the effective interest method and maintain a debt register that supports maturity, covenant and disclosure information.
Implementation note
For each debenture issue, maintain a debt schedule showing principal, transaction costs, effective interest, coupon payments, accrued interest, repayments, covenant dates and current/non-current classification. Reconcile the schedule to the general ledger and lender statements at every reporting date. Review modifications, waivers and refinancing events before finalising classification or measurement. A separate disclosure checklist should capture maturity analysis, security, interest-rate terms and significant risks. This discipline prevents the face value from being mistaken for the IFRS carrying amount.