Accretion is essentially the opposite of amortization, and is an accounting process used to adjust the overall amount, or book value, of bonds outstanding on financial statements. Amortization involves writing down the book value of a bond issued at a premium; accretion involves writing up the book value of a bond issued at a discount.
When a bond is issued at a discount — it sells for less than its face value — the issuer will record the bond on its financial statements at par value less the discount. Term bonds with a face value of $100 million, for example, may sell for $95.5 million: $100 million in par value with a $4.5 million discount. The bonds are initially recorded on the financial statements at $95.5 million.
The $4.5 million discount is accreted, or gradually decreased, each year. Because the discount is subtracted from the bonds’ par value, accreting the discount increases the value of the outstanding bonds on the financial statements. When the bonds near maturity, they will be recorded at their par value. For example, the bonds originally reported at $95.5 million will be recorded as $100 million – their face value – immediately before they mature.
