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Professional fileIAS 32L4 · Expert

File on issued financial instruments: liability / equity classification, split of a convertible bond, distributions and offsetting (IAS 32)

9 documents25 tasks≈ 300 min
0 / 28 items completed
Standards
IAS 32 — Financial Instruments: Presentation
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Verdane SA (fictitious entity) closes its accounts on 31 December 20X6. The preparer builds the file of the instruments issued and the bank balances of the year, submitted to a review check: preference shares, warrants, redeemable units, convertible bond, dividends and offsetting with a bank. Teaching simulation: the review trail of the file (preparation, reviewer notes and final sign-off) is simulated for demonstration purposes; it is neither a real review nor a validation of the content.

Your assignment

Classify the preference shares, the warrants and the redeemable units; compute the dividend on the shares classified as a liability; split the convertible bond (one flow at a time), check that there is no initial gain, compute the interest charge and the carrying amount of the first year; record the five entries; assess offsetting with Elvane Bank and compute the net amount; present the effect on the financial statements, deal with the review points and conclude. One document is not useful.

You prepare a complete file: documents, work, entries and conclusion, then compare your work with the solution and the review points of the file.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Documents

File documents

9 documents: open each one to read it.

Document 1Memo

Company profile and case conventions

Verdane SA (fictitious entity) closes its accounts on 31 December 20X6; its functional currency is the euro. Case conventions: amounts in EUR; coupons are paid in arrears; case convention (pedagogical assumption, not attributed to IAS 32): the tax effect is ignored; the rate of a similar liability is the estimate of the entity; the entries are illustrative.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Redeemable preference shares€800,000.00
Fixed dividend of the preference shares6%
Warrants40,000 units
Exercise price per warrant€25.00
Issue proceeds€2,000,000.00
Principal repayable€2,000,000.00
Annual coupon€60,000.00
Term of the bond3 years
Due date of the first coupon1 year
Due date of the second coupon2 years
Due date of the third coupon3 years
Rate of a similar liability without an option7%
Redeemable units€500,000.00
Dividend declared on the ordinary shares€150,000.00
Deposit with Elvane Bank€680,000.00
Overdraft with Elvane Bank€410,000.00
Sponsorship invoice€12,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort9

  • Company profile and case conventions

  • Preference shares and warrants

  • Terms of the convertible bond

  • Rate of a similar liability without a conversion option

  • Redeemable units

  • Dividend on the ordinary shares

  • Elvane Bank: balances and set-off agreement

  • Legal opinion on the redeemable units

  • Sponsorship invoice

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        Draw up the plan of the file: which items fall within IAS 32 and which documents are useful?

      2. Task 2Professional judgement

        Classify the redeemable preference shares.

      3. Task 3Calculation

        Compute the dividend on the shares classified as a liability.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the dividend on the shares classified as a liability.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      4. Task 4Analysis

        Compute the fixed amount of the warrants.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the fixed amount of the warrants.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      5. Task 5Professional judgement

        Classify the warrants.

      6. Task 6Professional judgement

        Classify the redeemable units in view of the legal opinion.

      7. Task 7Calculation

        Compute the present value of the principal of the convertible bond.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the present value of the principal of the convertible bond.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      8. Task 8Calculation

        Compute the present value of the first coupon.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the present value of the first coupon.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      9. Task 9Calculation

        Compute the present value of the second coupon.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the present value of the second coupon.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      10. Task 10Calculation

        Compute the present value of the third coupon.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the present value of the third coupon.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      11. Task 11Calculation

        Compute the liability component.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the liability component.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      12. Task 12Calculation

        Compute the residual equity component.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the residual equity component.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      13. Task 13Calculation

        Check that there is no initial gain or loss.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Check that there is no initial gain or loss.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      14. Task 14Calculation

        Compute the interest charge of the first year.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the interest charge of the first year.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      15. Task 15Calculation

        Compute the closing carrying amount of the liability of the first year.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the closing carrying amount of the liability of the first year.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      16. Task 16Journal entries

        Record the issue of the convertible bond.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        3. Line 3

        TotalsDebit0Credit0

      17. Task 17Journal entries

        Record the interest charge of the first year.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      18. Task 18Journal entries

        Record the payment of the coupon of the first year.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      19. Task 19Journal entries

        Record the dividend declared on the ordinary shares.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      20. Task 20Journal entries

        Record the dividend on the preference shares classified as a liability.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      21. Task 21Professional judgement

        Elvane Bank: are both offsetting criteria met?

      22. Task 22Calculation

        Elvane Bank: compute the net amount presented.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Elvane Bank: compute the net amount presented.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      23. Task 23Effects on the financial statements

        What is the cumulative effect of the five entries on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      24. Task 24Analysis

        Which information is to be prepared on these instruments for the notes?

      25. Task 25Conclusion

        Write the conclusion of the file and deal with the review points.

      File review

      Points raised during the review of this file: read them as the preparer would.

      Review notes

      • BlockingResolvedReview point (blocking): support the conditions of the exception for the redeemable units with a document
      • Non-blockingOpenReview point: attach the source of the rate of a similar liability to the convertible bond

      Information requests

      • ObtainedRequest to legal counsel: conditions of the exception for the redeemable units
      • Assumption documentedDocumented assumption: no other set-off agreement

      Completion checklist

      • Classification established on the contractual termsDone
      • Exception for the redeemable units supported by the legal opinionDone
      • Convertible bond split, flow by flow, with no initial gainDone
      • Dividends treated according to the classificationDone
      • Entries balanced and effect on the financial statements establishedDone
      • Source of the discount rate to be attached to the fileTo review

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 28).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 32 §16A
      • IAS 32 §35
      • IAS 32 §42