IAS 32 Flashcards
What is a Convertible bond? and How to account for it
Bond contains both financial liability (oblg to repay cash) and equity (oblg to issue a fixed no. of e’ own share)
Ias 32 states that instrument must be split into:
-liab component
-eq component
At issue date, calculated as follows:
-liab - PV of cash repay, disc using market rate on non-convertible bonds/ similar instrument w/out conversion right;
-eq - diff between cash recv and liab component @ issue date
Dr Cash
Cr Liab
Cr Eq
After initial recognition, Liab is meas @ ACM using market non-convertible rate (FC increase) Dr FC, Cr Liab
Why some Non-financial asset (NFA) is not accounted as a derivative?
IFRS 9 applies to contracts to buy or sell a non-financial item which settled net in cash.
However, contracts which are for e’s OWN USE are outside from scope IFRS 9.
> > always takes delivery -> qualifies as own use
what are financial assets? (IIE/IID)
any assets that are :
-cash
-C right to recv other finl asset
-c right to exchange FI with another e’ under conditions which are favourable
-non-derivative contract, e’ is may or may not be oblg to recv variable number of own e’ shares
What is the extended Defn of Finl A?
right to convert into XXX no of own shares of another entity
IIE - fixed
IID - variable
what are finl liab? (Finl Liab)
any liab that are :
-deliver cash
-C oblg to deliver other finl asset
-c oblg to exchange FI with another e’ under conditions which are favourable
-non-derivative contract, e’ is may or may not be oblg to deliver variable number of own e’ shares
What is the extended Defn of a FInl Liab?
Oblg to convert into XXX no of own shares (Finl Liab - Variable)
what are equity instruments? (issuer)
evidence of residual interest in the A after deducting all L; meas once; issuer - convert into xxx no of shares (fixed)
Accounting treatment of interest, dividends, losses and gains?
Follow the treatment of the FI itself:
-divd under pref sh (SOF - liab) = exp to sopl
-divd under share (SOF - equity) = SOCE
Can FI be offset?
IAS 1 - not permitted unless required by STD
Yes only when: (IAS 32)
-legally enforceable right to set off
-intends to settle net basis or realise A and L simultaneously
1 million pref sh for $3 each. No dividends are payable. Coasters will redeem the pref sh in 3 years time by issuing ord shares worth $3m. the exact no of shares issuable will be based on FV on 30 Sept 20X6. (classify eq or fin liab? for the year end 30 Sept 20X3)
2 million pref sh for $2.80 each. No divdends are payable. Redeemable in 2 years time by issuing 3 million ord shares worth. the exact no of shares issuable will be based on FV on 30 Sept 20X6.
4 million pref sh for $2.50 each. They are not mandatorily redeemable. a dividend is payable if, and only if , dividend are paid on ordinary shares.
1 - defn of finl liab: variable no of shares (finl liab)
2 - fixed no of shares - eq - settle it by own eq instruments
3 - defn of finl : contractual oblg to deliver cash ……/ no oblg (if and only if paid in ord shares) - eq
On 1 jan 20X1, Daniels issued a $50m three-year convertible bond at par.
-there were no issue cost.
-coupon rate is 10%, payable annually in arrears on 31 dec.
-bond redeemable at par on 1 jan 20X4
-bond holders may opt for conversion are two 25-cent equity shares for every $1 owed to each bondholder on 1 Jan 20X4.
-bond issued by similar entities without any conversion rights currently bear interest at 15%
-assume all bondholders opt for conversion in shares.
how will this be accounted for (IAS 32)?
Liab component - PV of cash flows discounted according to the market rate based on similar bonds under no conversion right.
Table:
date CF10% DF 15% PV
int
int
int
principal
PV 44291.90
Liab comp (50,000)
Equity 5708.1
Measuring ACM (FC)
Date OB Int15% Payment(outflow) 10% CL B
two 25 cents eq shares for $1
50x2 = 100m shares x 0.25 = $25m
sh premium = $55708.1-25000 = $30708.1
Craig issues a $100,000 4% 3 year convertible loan on 1 jan 20X6. The mkt rate of interest for similar loan w/out conversion right is 8%. The conversion terms are one equity share ($1 nominal value) for every $2 of debt. Conversion or redemption at par takes place on 31 dec 20X8.
a) if all holders elect for conversion?
b) no holders elect for conversion?
1) Table:
date CF DF 8% PV
Int
int
Int + principal
PV total = 89692
proceeds = 100,000
Equity = 10208
2)ACM 8%
Date OB FC 8% Cash paid 4% Cl B
How to distinguish whether it is a EI or LI? CCCOSO (IAS 32(
1- critical feature - mandatory / discretionary obligation to pay
2 - choice of payment - cannot avoid / can avoid
3 - contingent settlement :-
1 > beyond the holder and issuer control
2 > holder control (puttable instrument)
3 > issuer control
4 > highly unlikely future event to happen
4 - option to redeem - holder / issuer
5 - settlement opt to settle in e’ own share - variable / fixed no of shares
6 - other factors - fixed maturity date/ redemption/ liquidity of co // no maturity date
Derivatives (FFOS) has 3 main features. what are they?
(speculation / acc treatment - FVTPL)
- value changes (FV fluctuates in between) in response to change in underlying int %, commodity price or index
-no initial investment/ small
-settled net in cash in the future (sign now)
What to check for fixed for fixed test for eq instrument? what if not met
-no of shares
-$
If not met,
-treat as normal derivative (net cash settle)
Meas FVTPL
Initial - discl IFRS 7
In between -
Dr deriv
Cr SOPL
settle -
L pays G
But, if the co uses it for own use -> outside scope of IFSR 9
