No gain or loss on issue

Learning objectives

• Explain why separate recognition of the components gives rise to no gain or loss on initial recognition.L2
• Check that the sum of the components equals the proceeds of the issue, with no gain or loss.L2

Normative references

• IAS 32 §31IFRS 9 deals with the measurement of financial assets and financial liabilities. When the initial carrying amount of a compound instrument is allocated, the equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component; embedded derivatives other than the equity component (for example, a call option) are included in the liability component; the sum of the two components on initial recognition is always equal to the fair value of the instrument as a whole, and no gain or loss arises from initially recognising the components separately.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• A working paper comments on the issue of a convertible bond. Which of its conclusions is wrong?L2
• Mira SA issues bonds convertible into a fixed number of shares for proceeds of {issue_proceeds}. The fair value of a similar liability without a conversion option, which measures the liability component, is {liability_fair_value} (case data). Calculate the equity component, then the gain or loss recognised at issue.L2
• For an issue of convertible bonds of 600,000, whose liability component is 520,000 (case data), a trainee proposes the following entry: debit Cash 600,000; credit Debt 520,000; credit Finance income 80,000. Write a short justification stating whether this entry is acceptable, distinguishing rule, case facts and correction.L2