Chapter 11: Financial instruments (IFRS 9)

Convertible debentures. Alice issued one million 4% convertible debentures at the start of the accounting year at par value of $100 million. The rate of interest on similar debt without the conversion option is 6%. Explain how Alice should account for the convertible debenture in its financial statements for each of the three years.

As the tutor's answer assumes: the debentures run for three years and, if not converted, are redeemed at par at the end of year 3; the coupon is paid annually in arrears. Discount factors at 6%: year 1 0.943, year 2 0.890, year 3 0.840. Work in $000.