Can somebody help me with this please? To calculate FCFF we have to add back amortization of bond discount and to substract the amortization of bond premium. My logic is the opposite and I can’t figure out where I’m wrong. What was the accounting for discount / premium in the IS?
The amortization comes from the effective interest method. When the long-term debt is at premium (coupon rate > yield), you will need to amortize the liability, i.e. decreasing it until it reaches face value. Decreasing a liability is a debit, and the counterpart of this booking is a credit in the income statement (a gain). However, this is not a cash booking, so you need to subtract it in order to get to CFO (or FCFF in your case).
It’s simply the other way around for a bond issued at discount.
OK, I’m going a little crazy… I have decided that the bond is part of the assets and that was why I couldn’t figure it out. It’s good I’m not working these days, the results of the company could be surprising given my state of mind :))). Thank you for the help, Gurifissu!