IAS 32: Explanation of example is required.

Noman, I'm not sure exactly what it is that needs explaining! You've written out the explanation in the workings section of your post With a mixed instrument such as this, it's necessary to establish the present value of the loan and therefore, by default, also the present value of the equity (and that equity figure will not change over the three year life of the loan) The calculation to find the present value of the loan (by using the present values of all the cash flows associated with that loan) is shown in your working 1 The figures that you have posted are not accurate enough for me to illustrate my final point, so I'm going to copy your post but substitute accurate figures 1. Equity and liability elements -3 years interest (20,000 × 4% × 2.53) 2,024 -Redemption (20,000 × 0.77) 15,444 -Liability element 17,468 -Equity element (?) 2,532 Proceeds of loan notes 20,000 2.Loan note balance Liability element (W1) 17,468 Interest for the year at 9% 1,572 Less interest paid (20,000 × 4%) (800) Carrying value at 31 December 2009 $17,468 + $1,572 - $800 = $18,240 If the loan instrument (this mixed financial instrument) has a face value of $20,000 and the present value of the loan element is $17,468, then the balance of $20,000 - $17,468 = $2,532 must be the equity element and that figure is credited to the equity section of the statement of financial position Now when each year rolls by, the company will pay interest on the $20,000 face value of the loan at the coupon rate of 4% = $800 per annum But the EFFECTIVE rate of this instrument is 9% So to find the updated present value of the amount of the loan outstanding we need to unroll the 9% discount for one year ($17,468 * .09) and that's $1,572 and that figure is the appropriate finance cost of this instrument When we stop a moment and realise that, of this interest amount, we have actually PAID $800, so there remains a further $1,572 - $800 = $772 to account for (Dr Finance expense, Cr ???) That difference of $772 adds on to the liability of $17,468 to give us the present value after 1 year of $17,468 + $772 = $18,240 "But the total loan is of 20,000 so how carrying amount can be greater than 20,000?" It isn't! The carrying amount of the loan is $18,240 and that's less than $20,000 Do the same exercise for another year: $18,240 * 9% = $1,642 finance charge But $800 of that is paid So we need to add the difference $1,642 - $800 = $842 to the loan amount brought forward $18,240 + $842 = $19,082 carrying value of the loan liability at the end of year 2 Now do the same exercise for the third year $19,082 * 9% = $1,717 finance charge But $800 of that is paid So we need to add the difference $1,717 - $800 = $917 to the loan amount brought forward $19,082 + $917 + $19,999 and that's the $20,000 that is now to be paid at the end of the third year This is all explained in the lecture notes! OK?