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Hi Mike,
In case convertible loan we charge finance cost on debt portion/component using market interest rate.
That finance cost is charged in P&l and added to Debt Component, but what about equity component, should it be same in all years or it should decrease with difference between finance cost charged and interest paid. (Which means instead of charging all finance cost through p&l, should we charge the ‘difference between total finance cost calculated and interest paid’ through OCI?)
If Equity Component does not changes, the retained earnings will be lower, sum of debt component and equity component will be more than actual total actual liability, and what will be accounting treatment in last year of loan/debt to eliminate equity component.
Thanks in Advance.
‘but what about equity component, should it be same in all years’
Yes
The debt component element is calculated as the present value of the minimum payments scheduled under the debt terms so over time the debt liability carrying value increases until redemption date when it will be paid
OK?
Again, I would ask ‘what will be accounting treatment in last year of loan/debt to eliminate equity component.’
Thanks in Advance.
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