Splitting a compound instrument at inception

Learning objectives

• Explain that an instrument with both liability and equity characteristics is split on initial recognition into two components recognised separately.L1
• Account for the issue of a convertible bond as a liability component and an equity component.L3

Normative references

• IAS 32 §28The issuer of a non-derivative financial instrument evaluates its terms to determine whether it contains both a liability and an equity component; those components are classified separately (financial liability, financial asset or equity instrument) in accordance with para. 15.
• IAS 32 §30The classification of the liability and equity components of a convertible instrument is not revised as a result of a change in the likelihood that the conversion option will be exercised, even when exercise appears to have become economically advantageous to some holders; the contractual obligation to make payments remains until it is extinguished through conversion, maturity or some other transaction.

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

4 questions

• An interest-bearing bond convertible into a fixed number of the issuer's shares is split at initial recognition into a liability component and an equity component, recognised separately.L1
• A colleague summarises the treatment of an interest-bearing bond convertible into a fixed number of shares. Which of the colleague's sentences is wrong?L1
• Cyan SA issues bonds convertible into a fixed number of shares for total proceeds of {issue_proceeds}, received on the issue date. Case data: the fair value of a similar liability without a conversion option, which measures the liability component, is {liability_component_fv}. Record the issue entry for the convertible bonds.L3
• Lagune SA has issued convertible bonds split into a liability component and an equity component. To calculate diluted earnings per share under the if-converted method, leaving aside the case of antidilutive instruments, how is the convertible bond taken into account?L3