Dim Sum Bonds at Renault S.A

Abstract

This case explores the accounting for long-term debt from the perspective of the issuer of bonds payable.The global setting involving France-based Renault issuing Chinese yuan-denominated debt in the offshore markets (i.e., “dim sum bonds”) provides significant opportunity for secondary learning. The accounting could be undertaken from the perspective of U.S. GAAP or IFRS (i.e., the standards are identical for the principal transaction and events considered in this case, with the exception of hypothetical discussions related to the fair value option for debt available under SFAS 157 in U.S. GAAP).The case requires students to account for the issuance of bonds offered at a discount, to implement the effective interest method for several periods, to calculate the amount of interest expense that will be charged to the income statement over the life of the discounted bonds (i.e., to understand the economic rationale behind the prescribed effective interest rate method), to understand the income statement implications of early debt extinguishments and the transaction entries associated with these transactions, and to consider the implications of the fair value method had the issuer made this election.

Excerpt

UVA-C-2373

Apr. 13, 2016

Dim Sum Bonds at Renault S.A.

Under the leadership of turnaround kingpin Carlos Ghosn, and through its partnership with Nissan, France-based Renault became the fourth-largest carmaker in the world. While part of Renault's growth strategy had been to expand into emerging markets, it was also a front-runner in the all-electric vehicle (EV) market and had plans to capture even more. Both strategies included building up business in China.

In 2013, Renault closed on a 50-50 joint venture with Dongfeng Motors that introduced the Dongfeng Renault Automotive Company (DRAC). As part of that deal, Renault announced it would be producing vehicles locally in Wuhan, China, by 2016. It planned to open a new plant capable of manufacturing 150,000 vehicles a year. The factory opened on February 1, 2016.

Partnering with Dongfeng placed Renault front, right, and center of the demand for EVs in China. The Chinese government had mandated the purchase of EVs in an effort to reduce pollution problems. Ghosn announced that Renault was discussing its plans with Chinese officials to build one of its electric car models in China.

. . .

Keywords: bonds payable accounting, effective interest rate method, discount bond, fair value option, early extinguishment