ACCA Applied Skills · Financial Reporting · Financial instruments
Zeta Co issues a bond that the holder can convert into a fixed number of Zeta's ordinary shares at maturity. Under IAS 32, how is the equity component of this compound instrument measured on initial recognition?
The equity component is the residual: total proceeds less the fair value of the liability component. The liability is measured first by discounting the contractual cash flows at the market rate for similar debt without a conversion option. The equity amount is not valued separately.
- AAs the residual amount after deducting the fair value of the liability component from the total proceedsCorrect
- BAs the fair value of the conversion option, calculated using an option pricing model
- CAs the nominal value of the shares that would be issued on conversion
- DAs a proportion of the proceeds equal to the proportion of the bond's face value to the total share capital
Explanation
IAS 32 requires the liability component to be measured first, at the present value of the cash flows discounted at the market rate for similar non-convertible debt. The equity component is the residual, which is total proceeds less the liability. Valuing the option separately would be a different approach and is not permitted for the split.
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