Situation: A plc issued 6% convertible loan stock amounting $10 million and the effective interest rate is 10%. The liability and equity component of this loan stock $9 million and $1 million respectively. The plc had recognized the interest expense for the of $900,000 when the interest to be paid was $600,000. The IRB will only recognnize the interest amount paud during the year as deductible expenditure.
Answer
Accounting treatment:
The interest expenses of $900,000 will be included as interest payable of $600,000 where the excess will be amortized into convertible loan stock liability as premium. The carrying value is $9.3 million.
Tax Treatment:
Interest is deducted when paid. Since only $600,000 paid the excess is not deductible. Thus current and future tax charges will continue to be higher as the differences will not be deducted until the liability settled at $10 million. However the tax charges will be used to reduce the equity component. Tax base is $10 million.
CV - Tax Base = Temporary Difference
$9.30 - $10 = $0.7 Taxable Temporary Difference
My question is:
1) Does the nature of convertible loan stock affect the income tax / deferred calculation?
2) How to determine the carrying value of the convertible loan in company book at year end?
3) How come the tax base is $10 million whereas the situation stated that $0.30 ($0.9 - $0.6) was paid ?
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