ACCA SBR · Guided practice (Show me how)
Chapter 14: Financial Instruments (IAS 32, IFRS 7 and IFRS 9)
Convertible debentures with issue costs
Example 3 - Convertible debentures. Alice issued one million 4% convertible debentures at the start of the accounting year at par value of $100 million, incurring issue costs of $1 million. The rate of interest on similar debt without the conversion option is 6%. The impact of the issue costs increases the effective rate of interest on the debt to 6.34%.
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. The notes' working rounds each year's present value to one decimal place. Work in $ million.
Splitting the proceeds
Calculate the present value of the year 3 cash flow, and the liability and equity components of Alice's convertible debentures on initial recognition, before issue costs.
Issue costs and later measurement
Calculate the issue costs allocated to the equity component and the liability component net of its share of the issue costs, and state the rate used to measure the liability in later years.
Opening this exercise…