As we write more in our accounting tutorial series and other articles on this site, we come across different ways to deal with accounting and money, particularly public finances. For example, the other week, we looked at the Creditable Withholding Tax system operated in the Philippines. But today, we move west and look at the bond ledger account system used by the Reserve Bank of India and their issuing of debt instruments for raising funds for public expenditure.
What is a Bond Ledger Account?
The Reserve Bank of India (RBI), like all central banks, raises funds through periodic bond issues. Traditionally in public finances, debt funding was used to pay for capital projects, where the benefits would be spread over long periods. And therefore, the burdens of repayment would be approximately matched with the benefits received. However, most governments don’t restrict these funding rounds to capital projects but instead use them to fund their regular operating deficits. The most famous of course in this area is the United States and their use of Treasury Bills and their reliance upon their world reserve currency status. However, moving on.
When the RBI issues these bonds, they create an account for the bondholder, an account with the obvious name of a bond ledger account. These accounts would be maintained on a sub-ledger system rather than their general ledger system and are, in effect, like a bank account one would hold with your local private bank.
When the customer purchases the bond issue, they receive a Certificate of Holding or Certificate of Investment.
What is a Bond?
What is worth covering off next is what a bond is. Yes, it’s a financial instrument used by an institution, public or private, to raise funds. But more specifically, a bond is a promise to do something between two parties. In the case of those issued and using the BLA system, the instrument will stipulate:
- a coupon rate; this is an interest rate payable along with how the interest will be calculated – the method and tiing of compounding;
- there will be a repayment date, referred to a maturity date; and
- whether the bond can be traded and how that can be done. Most bonds issued around the world are bearer bonds, i.e. bought and sold by whoever is holding it at maturity is paid out.
From the RBI’s perspective, these bonds are recorded on their statement of financial position (balance sheet) as a liability. As they are typically issued for many years, they would initially be classified as a non-current liability. However, as maturity draws near and within the next 12 months, the bonds would change to a current liability classification.
Accounting for RBI Issued Bonds
Rather than going through all of the accounting debits and credits here, if you are interested in seeing the journal entries, mainly when dealing with premiums and discounts, I can recommend a couple of articles we have done on this already. The first article deals with coupon rates below market rates, i.e. at a discount. While the second article deals with an issuer selling bonds into the market with a coupon rate above the prevailing market rate.
How Are These Bonds Taxed?
As with corporate debt, the interest from the RBI issued bonds is subject to income tax. Unless the bond carries a non-taxable status, allowing the government to offer a lower coupon rate. Depending on the level of interest received, interest will be deducted at the source. Under the 2007 Finance Act, where the interest earned exceeds 10,000 INR, a deduction at source is required.
If you would like to see accounting journal entries for withholding systems, we have an article with all the detail.
That brings us to the end of our article bond ledger accounts and how the RBI use them. We welcome your feedback, and so please use the comments section below. Or, if you prefer, get in touch through our contact us page or ask a question form.