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Costs to issue or buy back issued shares

The accounting rule: Costs of issuing shares or a buy back of issued shares by the issuing entity are accounted for as a deduction from equity, net of any related income tax benefit (the issue or buy back not being part of a business combination). 

An entity typically incurs various costs in issuing or acquiring its own equity instruments. Those costs might include registration and other regulatory fees, amounts paid to legal, accounting and other professional advisers, printing costs and stamp duties. The transaction costs of an equity transaction are accounted for as a deduction from equity (net of any related income tax benefit) to the extent they are incremental costs directly attributable to the equity transaction … Read more

Convertible note with embedded derivative – The numbers

In practice, many conversion features in convertible notes fail equity classification, which means that the conversion feature is a financial liability.

The reason that many conversion features fail equity classification is that they contain contractual terms that result in the holder of the conversion feature having rights that are different to those of existing shareholders. This is because the contractual terms mean that either:

  • The number of shares to be issued varies
  • The amount of cash (or carrying amount of the liability) converted into shares varies
  • Both the number of shares and the amount of cash (the carrying amount of the liability) vary.

The commercial effect of this is that the holder of the conversion feature obtains a different … Read more

Convertible note with embedded derivative – Basics

In practice, many conversion features in convertible notes fail equity classification, which means that the conversion feature is a financial liability.

The reason that many conversion features fail equity classification is that they contain contractual terms that result in the holder of the conversion feature having rights that are different to those of existing shareholders. This is because the contractual terms mean that either:

  • The number of shares to be issued varies
  • The amount of cash (or carrying amount of the liability) converted into shares varies
  • Both the number of shares and the amount of cash (the carrying amount of the liability) vary.

The commercial effect of this is that the holder of the conversion feature obtains a different … Read more

Convertible notes – Basic requirements

Convertible notes are financial instruments that fall within the scope of IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments.

IAS 32 contains the definitions of financial liabilities, financial assets and equity. Therefore, whether a financial instrument should be classified as liability or equity is dealt with under IAS 32. As noted above, the standard approach in IFRS requires that a convertible instrument is dealt with by an issuer as having two ‘components’, being a liability host contract plus a separate conversion feature which may or may not qualify for classification as an equity instrument.

The definitions set out in IAS 32 for financial liabilities and equity are detailed and appear complex (see extracts below).… Read more

Classification of crypto-assets

Crypto-assets often have very different terms and conditions. The holder needs to evaluate their individual terms and conditions carefully in order to determine which International Financial Reporting Standard (IFRS) applies. Depending on the standard that applies, the holder may also need to assess its business model in determining the appropriate accounting.

Determining ownership of a crypto-asset when it is held by a custodian or a crypto-exchange may present additional challenges and could impact the determination of the appropriate accounting.

In the context of crypto-assets, a financial asset could be: cash, an equity instrument of another entity, a contractual right to cash or other financial assets, or a right to trade financial instruments on potentially favorable terms (e.g., … Read more

Offsetting of financial assets and financial liabilities

IAS 32 prescribes rules for the offsetting of financial assets and financial liabilities. It specifies that a financial asset and a financial liability should be offset and the net amount reported when and only when, an enterprise: Offsetting of financial assets and financial liabilities

  • has a legally enforceable right to set off the amounts; and
  • intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

Offsetting is usually inappropriate when: Offsetting of financial assets and financial liabilities

  • several different financial instruments are used to emulate the features of a single financial instrument (a ‘synthetic instrument’);
  • financial assets and financial liabilities arise from financial instruments having the same primary risk exposure (for
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