ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments

Hale plc issues a convertible bond for $10m. It is convertible at the holder's option into a fixed number of Hale's own ordinary shares, and carries 4% annual interest payable in cash. Which statement best describes the IAS 32 classification by Hale?

The bond is a compound instrument. Hale measures the liability as the present value of the interest and principal at a market rate for similar non-convertible debt, and the residual from proceeds is recognised in equity as the conversion option.

AA compound instrument, with a liability component for the present value of cash payments and an equity component for the residualCorrect
BA single financial liability at fair value through profit or loss
CA single equity instrument because conversion is into shares
DA liability component only, with the conversion right ignored until exercised

Explanation

Fixed-for-fixed conversion into a fixed number of shares meets the equity definition for the option, while the cash interest and repayment are liabilities. The liability is measured first at the present value of the cash flows using a market rate for non-convertible debt, and the equity is the residual.

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