Consolidated Financial Statements - Acer Group

15ACER INCORPORATED AND SUBSIDIARIESNotes to Consolidated Financial Statements (continued)(20) Convertible bondsConvertible bonds issued by the Company contain both a financial liability and an equity component.The equity component grants an option to the bondholder to convert a fixed number of bonds into afixed number of the Company‟s common shares. On initial recognition, the fair value of the liabilitycomponent is determined by reference to the fair value of a similar stand-alone debt instrument(including any embedded non-equity derivatives). The amount initially allocated to the equitycomponent is the residual after deducting the fair value of the financial liability component from thefair value of the entire compound instrument. Transaction costs directly attributable to the issuanceof the bonds are allocated to the liability and equity components in proportion to their initial carryingamounts.The difference between the initial carrying amount of the liability component and the redeemableamount that is payable on maturity is amortized and charged to interest expense using the effectiveinterest rate method over the life of the bond. The embedded financial instruments (redemptionoptions) are accounted for as financial liabilities at fair value through profit and loss and measured atfair value. The equity component of the convertible bonds is accounted for as capital surplusconversionright on initial recognition and is not subject to valuation in subsequent periods.When bonds are converted into common stock, the liability components are measured at fair value onthe conversion date, and changes in fair value are recognized immediately in profit or loss. Sharesof stock to be issued are recorded based on the adjusted carrying amount of the liability and equitycomponents of convertible bonds. No gain or loss is recognized.When the Company redeems the bonds from market, the redemption payment is allocated to theliability and equity components using a method consistent with the method used initially to allocatethe bond between its debt and equity components. The fair value of the liability component atredemption date is compared to its carrying amount, any gain or loss arising from redemption isrecognized in profit or loss. The difference between the carrying amount of equity component andthe redemption payment allocated to the equity component is accounted for as capital surplustreasurystock. If the remaining balance of capital surplus-treasury stock is insufficient to cover thedeficiency, the remainder is recorded as a reduction of retained earnings.When the bondholders require the Company to redeem the bonds, the redemption payment is deemedto fully redeem the liability component. The difference between the carrying amount of the liabilitycomponent and the redemption payment is recognized in profit or loss. The capital surplus ofcarrying amount of the equity component is transferred to other capital surplus item.The liability component of the bonds is classified as a current liability where the bondholders have theright to require the Company to redeem the bonds within one year. It can be reclassified to long-termliability once the redemption option period expires and the liability component qualifies as along-term liability.(21) Treasury stockCommon stock repurchased by the Company that is treated as treasury stock is reported at acquisitioncost. When treasury stock is sold, the sales proceeds in excess of cost are accounted for as capital(Continued)