FR - Complex Financial Instrument (In-Depth)

Question 1

What are the 4 steps to record convertible bonds

Answer 1

1. Calculate the bond liability
2. Calculate the equity balance
3. Allocate transaction cost, if any
4. Record the issue

Question 2

What is the derecognition of convertible bonds

Answer 2

1. Bonds do not exercise right the option of converting the bonds to common shares at maturity
2. ON maturity, the holder exercise the right to convert bonds to common share
3. Bonds holder exercises the right to convert of maturity

Question 3

Steps to record maturity convertible bonds

Answer 3

1. Record derecognition of the debt, debit to liability account
2. Transfer any related equity balance to expired conversion option equity expired conversion right account
3. Record the cash payment as credit to cash

Question 4

What are the convert bonds to share at maturity

Answer 4

1. Record the derecognition of the debt, that is , debit to the liability account
2. Record the derecognition of previously established equity element (contributed surplus) by debiting equity account
3. Record the issuance of the common shares, amount recognized

Question 5

Explain the third option where to convert bonds to shares is exercised prior to maturity of the bonds

Answer 5

Same process is applied as of the second where it is at maturity.

Question 6

Explain the initial measurement of convertible bonds under ASPE

Answer 6

1. Measure the equity portion at zero and record the entire FV of the instrument to the debt
2. Measure the easily determinable component at FV and the allocate residual amount to other components

Question 7

What are the requirement of repurchase prior to maturity - issuer option

Answer 7

1. The repurchase amount allocated to the debt component will be the fair value of the stand-alone debt on the date repurchase with the residual amount allocated to equity
2. Difference between the fair value of the debt component and the amortized cost of the debt is recognized as a gain or loss on derecognition of the liability
3. Conversion right are unrecognized. Consideration paid that was allocated to equity is a capital transaction
4. Consideration allocated to equity is less than the amount of the conversion right the difference is allocated to an expired conversion right - contributed surplus equity account

Question 8

What is calculated of perpetual debt

Answer 8

• Contractual right to receive interest payment on fixed date period of time, no right to receive refund of principal
• Measure of Fair value - cost of issuance is decrease off liability account
  Uses effective interest rate

Question 9

What is the difference of IFRS and ASPE using perpetual debt

Answer 9

ASPE - allows the use of straight line method or effective interest method at amortized cost

Question 10

Provide the initial measurement and subsequent measurement, derecognition of redeemable and retractable shares

Answer 10

Initial measurement - preferred shares recorded as liability initially recorded at the issued price which is the fair value of the consideration received.
Subsequent measurement - liability is recorded at amortized cost using effective interest method
Any dividend paid on preferred shares classified as a liability are recorded as interest expenses.
Derecognition - they are removed from the statement of FP.

Question 11

When should the derecognition of preferred share converted to common share are

Answer 11

1. Derecognized the convertible preferred share
2. REcord the issuance of the common share. Recognize the same amount that was unrecognized in Step 1