Skip to content

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

Zeta plc issues a bond for $10 million that is convertible at the holder's option into a fixed number of Zeta's own ordinary shares, and Zeta has no right to settle in cash. Under IAS 32, how should Zeta initially account for the bond?

Zeta must split the bond into liability and equity components. The liability is measured first by discounting the contractual cash flows at a market rate for similar debt without conversion rights, and the equity component is the residual of the proceeds. This is the required IAS 32 approach.

  1. AMeasure the whole $10 million as a financial liability at amortised cost
  2. BSeparate it into a liability component and an equity component, measuring the liability first at the present value of the cash flows at a market rate for similar non-convertible debtCorrect
  3. CSeparate it into a liability component at fair value and an equity component at the residual amount, with the equity measured first at its fair value using an option pricing model
  4. DRecord the whole $10 million in equity until conversion occurs

Explanation

IAS 32 requires split accounting for a compound instrument with a fixed-for-fixed conversion option. The liability is measured first, by discounting contractual cash flows at the market rate for equivalent non-convertible debt. The equity component is the residual. Valuing the equity first is the reverse of the required approach.

Did you get it right without looking?

One question tells you little. A timed set on Financial instruments shows your real accuracy, how long you take and where you lose marks.

Practise Financial instrumentsFree diagnostic mock

More Financial instruments questions