Forums › ACCA Forums › ACCA FR Financial Reporting Forums › Financial assets&liabilities – equity and debt instruments
- This topic has 3 replies, 3 voices, and was last updated 6 years ago by mika84.
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- November 9, 2018 at 1:30 am #484244
Hi,
does anybody know why the same bonds might be considered as both debt and equity instrument or am I missing anything ?
The following is example :On 1 January 20X1, Tokyo bought a $100,000 5% bond for $95,000,
incurring issue costs of $2,000. Interest is received in arrears. The bond
will be redeemed at a premium of $5,960 over nominal value on 31
December 20X3. The effective rate of interest is 8%.
The fair value of the bond was as follows:
31/12/X1 $110,000
31/12/X2 $104,000
Required:
Explain, with calculations, how the bond will have been
accounted for over all relevant years if:
(a) Tokyo planned to hold the bond until the redemption date.
(b) Tokyo may sell the bond if the possibility of an investment
with a higher return arises.
(c) Tokyo planned to trade the bond in the shortterm, selling it
for its fair value on 1 January 20X2.Then, in explanations it is said that:
(a) refers to amortised cost
(b) and (c) FVTOCI and FVTPL respectivelyNovember 9, 2018 at 3:04 pm #484298Hi,
So if it is “Convertible Bond”, where there is a choice given to convert the debt to equity.
This is an example of Compound Instruments. These instruments have the components of both the liability as well as equity.Is it clear now?
November 9, 2018 at 5:26 pm #484309Hi, can anyone explain the meaning of effective rate of interest and why we use it.
Also what is the logic of using market rate of interest when dealing with convertible debentures. I am a little confused about understanding the concept of substance of a transaction.November 9, 2018 at 6:38 pm #484317@jetavi said:
Hi,So if it is “Convertible Bond”, where there is a choice given to convert the debt to equity.
This is an example of Compound Instruments. These instruments have the components of both the liability as well as equity.Is it clear now?
I listened to the lecture on Amortised cost, as far as I understood these are examples of 1)Amortised cost 2)Amortised cost FVTOCI and 3)Amortised cost FVTPL
Chris mentioned, these kinds most unlikely to come in exam paper. - AuthorPosts
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