IE34 36 Exm 9 Compound financial instrument initial recognition

Last Updated on 12/02/2020 by 75385885

IAS 32 Financial Instruments: PresentationIE34 36 Exm 9: Compound financial instrument initial recognition

IE34 36 Exm 9 Compound financial instrument initial recognition

Example 9: Separation of a compound financial instrument on initial recognition

IE34 Paragraph 28 describes how the components of a compound financial instrument are separated by the entity on initial recognition. The following example illustrates how such a separation is made.

IE35 An entity issues 2,000 convertible bonds at the start of year 1. The bonds have a three-year term, and are issued at par with a face value of CU1,000 per bond, giving total proceeds of CU2,000,000. Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any time up to maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without conversion options is 9 per cent.

IE36 The liability component is measured first, and the difference between the proceeds of the bond issue and the fair value of the liability is assigned to the equity component. The present value of the liability component is calculated using a discount rate of 9 per cent, the market interest rate for similar bonds having no conversion rights, as shown below.

CU

Present value of the principal – CU2,000,000 payable at the end of three years

1,544,367

Present value of the interest – CU120,000 payable annually in arrears for three years

303,755

Total liability component

1,848,122

Equity component (by deduction)

151,878

Proceeds of the bond issue

2,000,000

 

Source EU rules on financial information disclosed by companies

 

Last Updated on 12/02/2020 by 75385885

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IE34 36 Exm 9 Compound financial instrument initial recognition IE34 36 Exm 9 Compound financial instrument initial recognition IE34 36 Exm 9 Compound financial instrument initial recognition IE34 36 Exm 9 Compound financial instrument initial recognition IE34 36 Exm 9 Compound financial instrument initial recognition IE34 36 Exm 9 Compound financial instrument initial recognition IE34 36 Exm 9 Compound financial instrument initial recognition IE34 36 Exm 9 Compound financial instrument initial recognition IE34 36 Exm 9 Compound financial instrument initial recognition IE34 36 Exm 9 Compound financial instrument initial recognition

IE35 An entity issues 2,000 convertible bonds at the start of year 1. The bonds have a three-year term, and are issued at par with a face value of CU1,000 per bond, giving total proceeds of CU2,000,000. Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any time up to maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without conversion options is 9 per cent.

IE35 An entity issues 2,000 convertible bonds at the start of year 1. The bonds have a three-year term, and are issued at par with a face value of CU1,000 per bond, giving total proceeds of CU2,000,000. Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any time up to maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without conversion options is 9 per cent.

IE35 An entity issues 2,000 convertible bonds at the start of year 1. The bonds have a three-year term, and are issued at par with a face value of CU1,000 per bond, giving total proceeds of CU2,000,000. Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any time up to maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without conversion options is 9 per cent.

IE35 An entity issues 2,000 convertible bonds at the start of year 1. The bonds have a three-year term, and are issued at par with a face value of CU1,000 per bond, giving total proceeds of CU2,000,000. Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any time up to maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without conversion options is 9 per cent.