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WorkpaperIAS 32 — Financial Instruments: PresentationL2 · L3

Compound instrument: split into a liability component and an equity component, entries for the issue, interest, coupon and conversion

2 missions10 sections to document75 min
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Status
Published

Objective 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.

10 sections · 30 blocks · 7 calculations · 4 entries

  • IAS 32 §35

Work this workpaper as a mission

Each case that uses this template opens in the mission workspace: data, analysis, calculation, entries, conclusion and review, with your progress saved.

2 instances from the cases: the calculations and entries below are run by the calculation engine.

File and entity
Convertible bond: split into a liability component and an equity component, interest charge, carrying amount and conversion at maturity
Case tasks documented here
  • Compute the present value of the principal.
  • Compute the present value of the first coupon.
  • Compute the present value of the second coupon.
  • Compute the liability component at issue.
  • Compute the residual equity component.
  • Check that there is neither gain nor loss at issue.
  • Record the issue of the convertible bond.
  • Record the interest charge of 20X6.
  • Record the payment of the coupon of 20X6.
  • Record the conversion at maturity.
1

Facts and data

Inputs

  • Instrument: interest-bearing bond, option to convert into a fixed number of shares, maturity

    TextRequired

    TWO_YEAR_BOND_WITH_A_COUPON_CONVERTIBLE_AT_MATURITY_INTO_A_FIXED_NUMBER_OF_SHARES

  • Issue proceeds (fair value of the instrument as a whole)

    Number

    1,000,000

  • Principal repayable

    Number

    1,000,000

  • Annual coupon paid in arrears

    Number

    40,000

  • Rate of a similar liability without a conversion option (%, case data)

    Number

    8 %

  • Number of periods to repayment

    Number

    2 years

  • Period of the first coupon

    Number

    1 years

  • Period of the second coupon

    Number

    2 years

  • Period of the third coupon (if any)

    Number

  • Interest charge of the period on the liability component (calculated in the case)

    Number

    74,293.55

  • Carrying amount of the liability converted at maturity (calculated in the case)

    Number

    1,000,000

2

Supporting documents

Evidence

  • Documents obtained and referenced (issue contract, cash-flow schedule, source of the rate of a similar liability)

    EvidenceRequired

3

Analysis of the split of a compound instrument

Analysis

IAS 32 §35

  • Points examined: compound instrument

    ChecklistRequired

    • The instrument has both an obligation to deliver and an option to convert into a fixed number of shares
    • Split at initial recognition, components recognised separately
    • Liability component measured first, at the rate of a similar liability without a conversion option
    • Equity component obtained as the difference from the proceeds
    • No gain or loss at initial recognition
    • Interest on the liability component recognised in profit or loss
4

Calculations

Calculations

IAS 32 §35

  • Present value of the principal

    Calculation

    857,338.82

    Principal repayable ; Rate of a similar liability without a conversion option (%, case data) ; Number of periods to repayment

  • Present value of the first coupon

    Calculation

    37,037.04

    Annual coupon paid in arrears ; Rate of a similar liability without a conversion option (%, case data) ; Period of the first coupon

  • Present value of the second coupon

    Calculation

    34,293.55

    Annual coupon paid in arrears ; Rate of a similar liability without a conversion option (%, case data) ; Period of the second coupon

  • Present value of the third coupon (if any)

    Calculation

    Annual coupon paid in arrears ; Rate of a similar liability without a conversion option (%, case data) ; Period of the third coupon (if any)

  • Liability component (present value of the principal + present values of the coupons)

    Calculation

    928,669.41

    Present value of the principal ; Present value of the first coupon ; Present value of the second coupon ; Present value of the third coupon (if any)

  • Residual equity component (proceeds − liability component)

    Calculation

    71,330.59

    Issue proceeds (fair value of the instrument as a whole) ; − Liability component (present value of the principal + present values of the coupons)

  • Check: proceeds − liability component − equity component (expected: zero)

    Calculation

    0

    Issue proceeds (fair value of the instrument as a whole) ; − Liability component (present value of the principal + present values of the coupons) ; − Residual equity component (proceeds − liability component)

5

Illustrative entries

Entries

  • Issue entry

    Entry

    AccountDebitCredit
    Cash received on issue1,000,000
    Liability component928,669.41
    Equity component71,330.59

  • Interest charge entry

    Entry

    AccountDebitCredit
    Interest expense74,293.55
    Liability component74,293.55

  • Coupon payment entry

    Entry

    AccountDebitCredit
    Liability component40,000
    Cash paid40,000

  • Conversion entry at maturity

    Entry

    AccountDebitCredit
    Liability component converted1,000,000
    Share capital and premium1,000,000
6

Judgment: rate of a similar liability without a conversion option

Judgment

IAS 32 §35

  • Rate retained for the liability component

    JudgmentRequired

    Rate supported by an observable similar liability

    Rate supported by an observable similar liability / Rate to be supported by further evidence

    Professional judgment: the rate of a similar liability is an estimate of the entity based on observable data; in the case it is given and is not imposed by the standard.

  • Rationale: source of the rate and comparability of the liability

    Text

    THE_TREASURY_NOTE_GIVES_THE_MARKET_RATE_OF_A_DEBT_OF_THE_SAME_TERM_AND_RANKING

7

Items to document for the disclosures on the compound instrument

Disclosure

IAS 32 §35

  • Information to prepare on the compound instrument

    Checklist

    • Amounts of the two components at the issue date
    • Conversion terms and maturity
    • Interest expense on the liability component
8

Effect on the financial statements

FS impact

  • Effect derived from the entries

    Table

9

Conclusion

Conclusion

  • Liability and equity components, absence of an initial gain or loss, entries of the period and judgment on the rate

    ConclusionRequired

10

Normative references

References

  • Normative references cited in this workpaper

    References

11

Checks and financial statement impact

  • Instrument describedPass
  • Rate judged and supportedPass
  • Components = issue proceedsPass
  • Issue entry balancedPass
  • Interest entry balancedPass
  • Coupon entry balancedPass
  • Conversion entry balancedPass
Assets
960,000
Liabilities
-37,037.04
Profit or loss
-74,293.55
OCI
0
Equity
997,037.04