Last Updated on 12/02/2020 by 75385885
IAS 32 Financial Instruments: Presentation
IE39-46 Example 11 Repurchase of a convertible instrument
Accounting for compound financial instruments
IE39 The following example illustrates how an entity accounts for a repurchase of a convertible instrument. For simplicity, at inception, the face amount of the instrument is assumed to be equal to the aggregate carrying amount of its liability and equity components in the financial statements, ie no original issue premium or discount exists. Also, for simplicity, tax considerations have been omitted from the example.
IE40 On 1 January 20X0, Entity A issued a 10 per cent convertible debenture with a face value of CU1,000 maturing on 31 December 20X9. The debenture is convertible into ordinary shares of Entity A at a conversion price of CU25 per share. Interest is payable half-yearly in cash. At the date of issue, Entity A could have issued non-convertible debt with a ten-year term bearing a coupon interest rate of 11 per cent.
IE41 In the financial statements of Entity A the carrying amount of the debenture was allocated on issue as follows:
|
CU |
|
|
Liability component |
|
| Present value of 20 half-yearly interest payments of CU50, discounted at 11% |
597 |
|
Present value of CU1,000 due in 10 years, discounted at 11%, compounded half-yearly |
343 |
|
940 |
|
|
Equity component |
|
|
(difference between CU1,000 total proceeds and CU940 allocated above) |
60 |
|
Total proceeds |
1,000 |
IE42 On 1 January 20X5, the convertible debenture has a fair value of CU1,700.
IE43 Entity A makes a tender offer to the holder of the debenture to repurchase the debenture for CU1,700, which the holder accepts. At the date of repurchase, Entity A could have issued non-convertible debt with a five-year term bearing a coupon interest rate of 8 per cent.
IE44 The repurchase price is allocated as follows:
|
Carrying value |
Difference |
||
|
CU |
CU |
CU |
|
|
Liability component: |
|||
|
Present value of 10 remaining half-yearly interest payments of CU50, discounted at 11% and 8%, respectively |
377 |
405 |
|
|
Present value of CU1,000 due in 5 years, discounted at 11% and 8%, compounded half-yearly, respectively |
585 |
676 |
|
|
962 |
1,081 |
-119 |
|
|
Equity component |
60 |
619 |
-559 |
|
Total |
1,022 |
1,700 |
-678 |
IE45 Entity A recognises the repurchase of the debenture as follows:
|
DR |
Liability component |
CU962 |
|
|
DR |
Debt settlement expense (profit or loss) |
CU119 |
|
|
CR |
Cash |
CU1,081 |
To recognise the cash paid of the liability component
|
DR |
Equity |
CU619 |
|
|
CR |
Cash |
CU619 |
IE 46 The equity component remains as equity, but may be transferred from one line item within equity to another.
Source EU rules on financial information disclosed by companies
Last Updated on 12/02/2020 by 75385885 Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). Individual jurisdictions around the world may require or permit the use of (locally authorised and/or amended) IFRS Standards for all or some publicly listed companies. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. The specific status of IFRS Standards should be checked in each individual jurisdiction. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.
IE39-46 Example 11 Repurchase of a convertible instrument IE39-46 Example 11 Repurchase of a convertible instrument IE39-46 Example 11 Repurchase of a convertible instrument IE39-46 Example 11 Repurchase of a convertible instrument IE39-46 Example 11 Repurchase of a convertible instrument IE39-46 Example 11 Repurchase of a convertible instrument IE39-46 Example 11 Repurchase of a convertible instrument IE39-46 Example 11 Repurchase of a convertible instrument IE39-46 Example 11 Repurchase of a convertible instrument IE39-46 Example 11 Repurchase of a convertible instrument
The following example illustrates how an entity accounts for a repurchase of a convertible instrument. For simplicity, at inception, the face amount of the instrument is assumed to be equal to the aggregate carrying amount of its liability and equity components in the financial statements, ie no original issue premium or discount exists. Also, for simplicity, tax considerations have been omitted from the example.
The following example illustrates how an entity accounts for a repurchase of a convertible instrument. For simplicity, at inception, the face amount of the instrument is assumed to be equal to the aggregate carrying amount of its liability and equity components in the financial statements, ie no original issue premium or discount exists. Also, for simplicity, tax considerations have been omitted from the example.
The following example illustrates how an entity accounts for a repurchase of a convertible instrument. For simplicity, at inception, the face amount of the instrument is assumed to be equal to the aggregate carrying amount of its liability and equity components in the financial statements, ie no original issue premium or discount exists. Also, for simplicity, tax considerations have been omitted from the example.