Unamortized premium

What is an Unamortized Premium?

An unamortized premium refers to the portion of a bond premium that has not yet been expensed in relation to the earnings it generates over time. When a bond is sold for more than its par value, the difference between the sales price and the par value is the premium. Over the life of the bond, this premium is gradually expensed through a process called amortization. In the context of financial factoring, it is the outstanding amount of the premium that has not been written off through business's earnings.

Understanding Amortization in Factoring

In financial factoring, a business sells its accounts receivable to a third party at a discounted price to improve cash flow. The process of spreading out a premium over the duration of a factoring agreement is similar to the amortization of a bond premium. However, instead of a bond, it is the receivables that are being considered and the costs associated with the factoring agreement that must be gradually expensed.

The Importance of Tracking Unamortized Premiums

Keeping track of unamortized premiums is essential for accurate financial reporting. It impacts a company's balance sheet by showing the actual value of assets and liabilities. Moreover, it affects the profit-and-loss statement as the amortization of the premium can reduce taxable income.

Unamortized Premium in Financial Statements

In the company's financial statements, an unamortized premium is listed as an asset. Over time, as the premium is amortized, this value decreases, and the expense is recorded on the income statement, reducing the company's net income.

Calculating Unamortized Premiums

Calculating the unamortized premium involves determining the initial premium amount and subtracting the portion that has already been amortized. The result is the unamortized premium, which will continue to be amortized until the financial instrument matures or the factoring agreement concludes.