War bonds — domestic government bonds (DGB) — have become an effective investment instrument for supporting the state budget, accessible to individuals, businesses, and foreign investors. Funds raised for the State Budget of Ukraine through the placement of such bonds are used to meet the country’s ongoing financial needs under martial law, in particular social and defence-related expenditures. Accordingly, the acquisition, proper documentation, and accurate accounting treatment of DGB are gaining increasing practical significance.
Particular attention should be paid to the purchase of DGB in the inter-coupon period, when the total payment amount comprises several components. In such cases, the accountant should correctly determine which portion of the amount paid constitutes the cost of the investment, which represents the premium, and which relates to accrued coupon income. This allocation directly affects the initial measurement of the investment, the recognition of coupon income, and the financial result from the subsequent disposal of the bond.
Errors at this stage lead to misstatements of the initial cost of the investment, interest income, and the financial result from the sale of the security. Therefore, when dealing with DGB transactions in the inter-coupon period it is essential to apply a clear and consistent approach to calculations, documentation, as well as accounting and tax treatment.
How to reflect transactions in accounting
Bonds acquired for short-term holding or subsequent sale are generally recognised as current financial investments. If they are held on a long-term basis, accounts within Class 14 are used. In all cases, when purchasing between coupon payment dates, the cost of the security and the amount of accrued interest should be identified separately.Interest income on coupon-bearing bonds accrues throughout the entire coupon period and, from an economic perspective, belongs to the holder who owned the bond during the relevant period. Accordingly, the mere receipt of a coupon does not imply that its full amount constitutes income of the current holder.
For the seller, the accrued coupon income as of the sale date should be recognised separately as financial income, while the amount attributable to the bond itself should be recognised as income from the disposal of a financial investment. For the purchaser, the accrued coupon income paid to the seller does not increase the initial cost of the investment; instead, it is accounted for separately until the coupon payment is received from the issuer.
This approach ensures a clear distinction between the result from the disposal of the bond and interest income, and prevents overstatement of the cost of the financial investment at the purchaser’s end. Upon receipt of the coupon, the purchaser recognises as income only the portion of interest accrued after the transfer of ownership of the bond.
Which accounts to use and how to record the entries
In practice, such transactions are most commonly recorded using account 352 “Other Current Financial Investments” where the bonds are classified as current investments, or account 143 “Investments in Unrelated Parties” where they are held on a long-term basis. Accrued coupon income is typically accounted for using account 373 “Settlements on Accrued Income”, interest income is recognised through account 732 “Interest Received”, income from the disposal of financial investments is recorded in account 741, the carrying amount is written off through account 971, and settlements are recorded using accounts 311, 377, 361, or 685 depending on the terms of the transaction and the selected analytical breakdown.The journal entries set out below are illustrative and provided as general guidance. The specific correspondence of accounts should be determined by the entity based on the intended holding period of the bonds, the terms of the transaction, and its accounting policies.
This approach is consistent with the requirements of the Instruction on the Application of the Chart of Accounts for Accounting.
| Counterparty | Transaction Details | Typical Journal Entry |
|---|---|---|
| Purchaser | Recognition of the bond at cost | Dr 352 (or 143) Cr 311, 377, 685 |
| Purchaser | Recognition of accrued coupon income paid to the seller | Dr 373 Cr 311, 377, 685 |
| Purchaser | Receipt of the coupon relating to interest accrued up to the acquisition date | Dr 311 Cr 373 |
| Purchaser | Receipt of the coupon relating to interest accrued after the acquisition date | Dr 311 Cr 732 |
| Seller | Recognition of income from the disposal of the bond | Dr 377, 361 Cr 741 |
| Seller | Derecognition of the carrying amount of the bond | Dr 971 Cr 352 (or 143) |
| Seller | Recognition of accrued coupon income attributable to the seller | Dr 377, 361 Cr 732 |
| Seller | Receipt of payment from the purchaser | Dr 311 Cr 377, 361 |
What to pay attention to in practice
The most common mistake is to allocate the entire payment amount either solely to income from the disposal of the bond or solely to the cost of the financial investment. As a result, the seller’s financial result from the sale is misstated, while the purchaser’s carrying value of the acquired bond is overstated.To avoid errors, it is essential to follow the economic substance of the transaction: accrued coupon income belongs to the holder who owned the bond during the relevant period, even if the coupon is actually paid to the new holder.
For the purchaser, it is critically important not to include interest accrued up to the acquisition date in the initial cost of the bond. Otherwise, there is a risk of double recognition of income: first through an overstated investment cost, and subsequently upon receipt of the full coupon amount from the issuer.
It is also advisable to prepare a separate calculation of accrued coupon income as at the transaction date. This facilitates internal control, simplifies the verification of journal entries, and supports the chosen approach in the event of tax inquiries.
Numerical example
Assume that an entity acquires a bond in the inter-coupon period and, under the agreement, pays the seller a total amount of UAH 106,000. As this amount comprises several components, the purchaser must independently determine which portion relates to the cost of the security, which to the premium, and which to accrued coupon income.Under the terms of the example, the nominal value of the bond is UAH 100,000, the premium is UAH 2,000, and the accrued coupon income as at the acquisition date is UAH 4,000. Accordingly, the initial cost of the financial investment amounts to UAH 102,000, while UAH 4,000 is recognised separately as accrued coupon income.
By the date of the next coupon payment, the entity has amortised part of the premium in the amount of UAH 1,000. On the coupon payment date, the entity received UAH 10,000 from the issuer and subsequently sold the bond for UAH 101,000 (excluding accrued coupon income). At the same time, the new purchaser additionally compensated UAH 2,000 of accrued interest.
| Step | Transaction | Journal Entry | Amount, UAH |
|---|---|---|---|
| 1 | The purchaser independently determined the components of the total acquisition amount: nominal value — UAH 100,000; premium — UAH 2,000; ACI — UAH 4,000 | Accountant’s calculation | 106 000 |
| 2 | Initial recognition of the bond (nominal value and premium) | Dr 352 Cr 311 | 102 000 |
| 3 | Separate recognition of accrued coupon income paid to the seller | Dr 373 Cr 311 | 4 000 |
| 4 | Amortisation of a portion of the premium up to the coupon payment date | Dr 732 Cr 352 | 1 000 |
| 5 | Receipt of the coupon to the extent of reimbursement of previously paid ACI | Dr 311 Cr 373 | 4 000 |
| 6 | Recognition of interest income for the holding period after acquisition | Dr 311 Cr 732 | 6 000 |
| 7 | Recognition of income from the disposal of the bond | Dr 377 Cr 741 | 101 000 |
| 8 | Derecognition of the carrying amount of the bond, including the partially amortised premium | Dr 971 Cr 352 | 101 000 |
| 9 | Recognition of accrued coupon income attributable to the seller as at the sale date | Dr 377 Cr 732 | 2 000 |
| 10 | Receipt of the total consideration from the purchaser under the sale agreement | Dr 311 Cr 377 | 103 000 |
As this example demonstrates, in the inter-coupon period an accountant cannot mechanically allocate the entire payment amount to the cost of the bond. The purchaser should first independently determine the structure of the total acquisition price and distinguish between the nominal value, the premium, and the accrued coupon income. In the scenario described, of the total UAH 106,000, an amount of UAH 102,000 is recognised as the initial cost of the financial investment, comprising UAH 100,000 of nominal value and UAH 2,000 of premium, while UAH 4,000 of accrued coupon income is accounted for separately in account 373. Subsequently, part of the premium amounting to UAH 1,000 is amortised, reducing the carrying amount of the bond to UAH 101,000 and simultaneously adjusting the interest income. As a result, the purchaser clearly distinguishes between three components: the investment cost, premium amortisation, and coupon income.
What to consider in tax accounting
For corporate income tax purposes, the starting point remains the profit before tax determined in accordance with accounting standards. Therefore, incorrect allocation of the bond’s cost, premium, and accrued coupon income directly affects the tax result, as it alters the recognised income and expenses of the reporting period.If the entity is subject to corporate income tax and applies tax adjustments, it should separately consider specific adjustments related to transactions involving the sale or other disposal of securities, as prescribed by paragraph 141.2 of the Tax Code of Ukraine. This is also emphasised in tax guidance concerning the completion of the securities appendix and the determination of a separate financial result for securities transactions.
At the same time, coupon income should not be mechanically equated with the result from the disposal of the bond. For both accounting and tax purposes, the seller and the purchaser should recognise only the portion of interest income corresponding to the actual holding period of the security by each party. This approach reduces the risk of errors in determining the financial result and in completing the tax return.
Common accounting errors
In practice, the most frequent errors occur in four areas: allocating the entire contractual payment to the cost of the bond; recognising the entire coupon as income solely for the party that actually received the funds from the issuer; failing to distinguish between income from the disposal of the security and interest income; and not preparing a separate calculation of accrued coupon income as at the purchase or sale date. Each of these errors may distort both the accounting financial result and tax indicators.
Key points
Accordingly, when purchasing DGB in the inter-coupon period, the accountant should correctly determine the structure of the total acquisition amount: separately identifying the cost of the investment, the premium, and the accrued coupon income. Such allocation ensures the accurate determination of the initial cost of the financial investment, proper recognition of coupon income, and the avoidance of errors upon the subsequent disposal of the bond. If this approach is clearly embedded in the accounting policy, primary documentation, and internal calculations, the entity will significantly reduce the risk of errors in both accounting and tax reporting.For additional guidance and practical support regarding DGB accounting, please contact BDO in Ukraine.
