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How do we measure a convertible bond now that it has failed the contractual cashflow model test under IFRS 9. Do we still split into Liability & Equity? If yes, how?
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Covertable bond has two components : 1 of Liabilty portion and other is equity portion since it can be converted into share on maturity date.
How to divide into equity and liability to be reported in SOFP?
-P.V of the cash out flow measured associated with bond, (discount factor market rate not interest rate of bond it self)
– difference b/w the P.V and net proceeds of issue is Equity potion.Two disclosures in SOFP. See chaperter 16 kaplan book illustration 2
Longterm Liab:
10% bond (for instance)equity
Thank you decentshaw. You know you cannot use amortised cost except where it meets the two conditions: business model and cashflow model. So my question is, since it has failed this test what do we do. The bond was not purchased solely to receive interest as cashflow – it is also convertible.
At this rate, if a question comes on it, i shall do as before i.e. as you have stated but is has not passed the model test.
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ITS my weakest portion i just read the chapter a day ago.
I think you are confusing
If u are an entity that issues Conv. Bond (Financial Instruments) and you choose to report in SOFP. Then It will be reported as I told split b/w Financial Liab and Equity.
IF Conv.Bond is financial Asset i.e you buy it and concerned how to report in your books, Conv. Bonds are compound fin. instruments and usually classified as FVTPL and CANNOT BE CLASSIFIED AS AMORTISED COST
You have three classifications of Financial asset.
1-FVTPL {short term-Trading purpose- Frequent buying/selling} *No Impairment
>Equity Instruments (shares held for trading)
>Debt Instruments (Debenture and bonds)
>Compound Instrument (Conv.bonds)
> Derivatives2-FVTOCI {-cant be held for trading } * No Impairment
>Equity Instruments only
3-And Amortised Cost. {business model test and C.F test} * Impairment
Every Instument that meet 2 tests:
May include>Receivables
>Debt Instrument that meet 2 conditions.
> Even equity instrument traded at quoted mkt but rare case
SPECIFICALLY not Include Compund Instrument( Conv. Bonds etc)I Think since it will be classify in FVTPL , there will be hint of F.V.
I not happy with examiner since no article has been written in this regard. IFRS-9 test should be limited , other wise not good.
I hope It may help.
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