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Financial assets&liabilities – equity and debt instruments

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.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • November 9, 2018 at 1:30 am #484244
    mika84
    Member
    • Topics: 99
    • Replies: 149
    • ☆☆☆

    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 respectively

    November 9, 2018 at 3:04 pm #484298
    jetavi
    Member
    • Topics: 10
    • Replies: 309
    • ☆☆☆

    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?

    November 9, 2018 at 5:26 pm #484309
    kartik123456
    Participant
    • Topics: 4
    • Replies: 2
    • ☆

    Hi, 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
    mika84
    Member
    • Topics: 99
    • Replies: 149
    • ☆☆☆

    @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.

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