Compound financial instrument
Assess the substance of the contractual terms, including whether the conversion feature in the issued instrument meets the fixed-for-fixed equity condition, considering the holder’s rights, settlement terms and any relevant exceptions. On initial recognition of a qualifying compound instrument, measure the liability component as the fair value of a similar liability without the equity feature; assign the residual proceeds to equity. Subsequently account for the liability under the applicable financial instrument requirements.
Worked example
A company receives $1,000 for a bond convertible into a fixed number of its shares. An equivalent non-convertible bond has a fair value of $920. If the option qualifies as equity, recognise a $920 liability and $80 equity component initially.
Common mistake
Treating all convertible debt as a liability or measuring the equity component first as the difference between share market price and conversion price without applying IAS 32.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Direct | September 2026–June 2027 |
