Question

On January 1, 2020 company issued $ 1.5 million of five year, 6% convertible bonds at par value. Each $ 1000 bond is convertible into 100 common shares. A similar bond (without conversion feature) would have been issued at a market yield of 9%. In the same year on December 31, $ 2000,000 worth of bonds were converted to common shares.

Required: Calculate the value of the bond according to IFRS and ASPE and also show the journal entries. The measurement of the bond should be done according to IFRS and ASPE. Does this has any effect on the debt to equity ratio of the company.

Answer 1

Compound financial instruments-

Instruments which have component of both i.e financial liability as as equity then it will be called as compound financial instrument.

Financial liability- Any instrument which gives power to other person to claim cash or other asset or fixed number of share for fixed consideration will be called as financial liability. In financial liability the company does not have right to deny the contractual cashflows.These has to be paid.

Equity-

Which does not have any obligation to repay or fixed payment of finance cost. This bears only residual interest.

Since there is compulsory payment of interest in the given case scenario which cannot be denied by company hence it has to be accounted as compound financial instrument.

Even if you find it difficult to analyse then you can comment me for explanation.

Thanks,

Please find the attached image for Journal entries.