(IFRS) for Small and Medium-sized Entities (SMEs)

IFRS FOR SMES – JULY 2009Appendix to Section 22Example of the issuer’s accounting for convertible debtThe Appendix accompanies, but is not part of, Section 22. It provides guidance for applying therequirements of paragraphs 22.13–22.15.On 1 January 20X5 an entity issues 500 convertible bonds. The bonds are issued at parwith a face value of CU100 per bond and are for a five-year term, with no transactioncosts. The total proceeds from the issue are CU50,000. Interest is payable annually inarrears at an annual interest rate of 4 per cent. Each bond is convertible, at the holder’sdiscretion, into 25 ordinary shares at any time up to maturity. At the time the bonds areissued, the market interest rate for similar debt that does not have the conversion optionis 6 per cent.When the instrument is issued, the liability component must be valued first, and thedifference between the total proceeds on issue (which is the fair value of the instrument inits entirety) and the fair value of the liability component is assigned to the equitycomponent. The fair value of the liability component is calculated by determining itspresent value using the discount rate of 6 per cent. The calculations and journal entriesare illustrated below:CUProceeds from the bond issue (A) 50,000Present value of principal at the end of five years(see calculations below) 37,363Present value of interest payable annually in arrears for five years 8,425Present value of liability, which is the fair value of liability component (B) 45,788Residual, which is the fair value of the equity component (A) – (B) 4,212The issuer of the bonds makes the following journal entry at issue on 1 January 20X5:Dr CashCr Financial Liability – Convertible bondCr EquityCU50,000CU45,788CU4,212The CU4,212 represents a discount on issue of the bonds, so the entry could also be shown‘gross’:Dr CashDr Bond discountCr Financial Liability – Convertible bondCr EquityCU50,000CU4,212CU50,000CU4,212132 © IASCF