IAS 32Chapter 4Lesson 1
Splitting a compound instrument: the liability first, equity as the residual
Step 1 of 8Learning objectives
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An instrument that contains both a debt and a conversion option into a fixed number of shares is split at inception; the liability is measured first, at the rate of a similar liability without a conversion option, and equity is the residual, with no gain or loss.
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Learning objectives
- Explain that an instrument with both liability and equity features is split at inception into two components recognised separately.
- Calculate the liability component by discounting the flows at the rate of a similar liability without a conversion option, then the residual equity component.
- Justify the choice of the liability's discount rate as a case judgement datum, not as a rate imposed by the standard.
- Account for the issue of a convertible bond as a liability component and an equity component, and check that there is no gain or loss.