Last reviewed: July 2026.
A debenture is a form of debt instrument used to raise long-term finance. The issuer normally receives cash and undertakes to pay interest and repay principal according to contractual terms. In IFRS reporting, the accounting depends on whether the instrument is a financial liability, equity instrument or compound instrument.
Most ordinary redeemable debentures create a financial liability because the issuer has a contractual obligation to deliver cash. IAS 32 addresses liability-versus-equity presentation, while IFRS 9 addresses recognition and measurement.
Liability or equity classification
The name “debenture,” “bond” or “preference instrument” does not determine classification. The key question is whether the issuer has a contractual obligation to deliver cash or another financial asset. A mandatory redemption amount and contractual coupon generally indicate a liability.
A convertible debenture may contain both a liability component and an equity conversion option. When the fixed-for-fixed conditions and other requirements are met, the components are accounted for separately at initial recognition.
Initial recognition
A financial liability is initially measured at fair value. For a liability not measured at fair value through profit or loss, directly attributable transaction costs are included in the initial measurement. If the instrument is issued at par with no material transaction costs, the initial carrying amount may equal the cash received.
If issued at a discount or premium, or if issue costs are significant, the initial carrying amount differs from the redemption amount.
Basic entries for a liability debenture
| Transaction | Debit | Credit |
|---|---|---|
| Issue at par | Cash | Debenture/financial liability |
| Issue costs for liability at amortised cost | Financial liability | Cash/payable |
| Effective-interest finance cost | Finance cost | Financial liability |
| Coupon payment | Financial liability | Cash |
| Redemption at maturity | Financial liability | Cash |
The exact entries depend on the terms and whether the coupon paid equals the effective finance cost. The effective-interest method allocates interest expense over the life of the liability and moves the carrying amount toward the amount payable at maturity.
Worked effective-interest example
Assume a company issues debentures with a face value of 100,000 CU for proceeds of 96,000 CU after considering directly attributable issue effects. The annual cash coupon is 5,000 CU, while the effective interest rate is 7%.
- Opening carrying amount: 96,000 CU
- Finance cost at 7%: 6,720 CU
- Cash coupon paid: 5,000 CU
- Increase in liability: 1,720 CU
- Closing carrying amount: 97,720 CU
The difference between effective finance cost and cash coupon increases the carrying amount toward the redemption amount.
Issue at a premium or discount
A discount is not necessarily recorded as a separate asset or immediate expense under modern amortised-cost accounting. It forms part of the effective yield and is recognised through finance cost over the instrument’s life. Similarly, a premium received affects the effective interest calculation.
Transaction costs
Directly attributable costs of issuing a liability measured at amortised cost reduce the initial carrying amount and are included in the effective-interest calculation. General administration or costs that would have been incurred regardless of the issue do not automatically qualify.
Convertible debentures
A compound instrument includes both a liability and an equity component. The liability component is generally measured first using the fair value of a similar liability without the conversion feature. The residual is recognised in equity. The liability then follows IFRS 9 measurement requirements, while the equity component is not remeasured.
Classification is technical and depends on the exact settlement terms. Variable-share settlement, foreign-currency clauses or contingent features can change the conclusion.
Presentation and disclosures
Classify the liability as current or non-current using the applicable presentation requirements and contractual rights at the reporting date. Present finance costs consistently and disclose significant terms, maturity, interest rates, security, defaults, liquidity risk and accounting policies as required.
For related topics, read share capital accounting, debentures of a company, and redemption of debentures.
Common mistakes
- classifying an instrument by its title rather than contractual obligations;
- charging only the cash coupon as finance cost;
- expensing qualifying issue costs immediately for an amortised-cost liability;
- failing to separate a compound instrument;
- ignoring redemption premiums or embedded terms;
- using the original face value instead of the carrying amount in calculations.
Control checklist for a debenture issue
- Obtain board and legal authorisation.
- Review the complete instrument terms.
- Determine liability, equity or compound classification.
- Measure fair value and qualifying transaction costs.
- Prepare an effective-interest schedule.
- Reconcile coupon payments and carrying amounts.
- Monitor covenants and maturity requirements.
- Prepare IFRS 7 and presentation disclosures where applicable.
Modification and early settlement
If the contractual terms of a debenture are modified, the entity assesses whether the old liability should be derecognised and a new liability recognised or whether the existing carrying amount should be adjusted. The conclusion depends on IFRS 9 requirements and the significance of the change. Fees and costs are accounted for according to that conclusion.
On early redemption, compare the consideration paid with the carrying amount derecognised. Any resulting gain or loss is recognised according to the applicable requirements. Convertible and related-party instruments may require additional analysis.
Related Accounting Support guides
Key takeaway
Debenture accounting follows the economic obligation and the instrument’s contractual cash flows. Most redeemable debentures are liabilities measured using IFRS 9, while IAS 32 determines presentation and whether a conversion feature creates a separate equity component.
Official references: IAS 32 overview, IFRS 9 overview, and ACCA financial-instrument guidance.