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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

QualificationExamRelationshipPeriod
ACCA FR Direct September 2026–June 2027
ACCA SBR Direct September 2026–June 2027