IAS 32 · Workpapers (Step 4 of 5)
Workpaper assignment
- Course
- Exercises
- Case studies
- Workpapers
- Exams
Compound instrument: split into a liability component and an equity component, entries for the issue, interest, coupon and conversion
File on issued financial instruments: liability / equity classification, split of a convertible bond, distributions and offsetting (IAS 32)
Section 1 of 9
Objective
Section brief
- What to document
- The engagement, its scope and the working mode chosen.
- Why
- A workpaper answers one precise question: framing it avoids off-topic work.
- How
- Read the objective and the assignment, then choose the mode (guided, semi-guided, professional).
- Expected result
- You know which question the workpaper must settle, and for which reporting date.
- Your role
- Preparer of the IAS 32 workpaper
- Level
- Expert
- Estimated time
- ≈ 75 min
- Progress
- 0 / 5 steps done (review excluded)
Context
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.
Assignment
Split and entries of the convertible bond
Purpose of the workpaper
Record the issue proceeds, the principal, the coupon, the rate of a similar liability without a conversion option and the due dates. Discount each flow separately, add the present values to obtain the liability component, then deduct it from the proceeds to obtain the residual equity component. The rate and the amounts are case data: the rate is never presented as imposed by the standard. The entries of the period (interest, coupon, conversion) take up the amounts calculated in the case.
Questions of the file covered by this workpaper
- Compute the present value of the principal of the convertible bond.
- Compute the present value of the first coupon.
- Compute the present value of the second coupon.
- Compute the present value of the third coupon.
- Compute the liability component.
- Compute the residual equity component.
- Check that there is no initial gain or loss.
- Record the issue of the convertible bond.
- Record the interest charge of the first year.
- Record the payment of the coupon of the first year.
Documents in the file
Open the documents to pick out the relevant information.