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Accounting for compound financial instruments

»Ê¹ÚÌåÓýapp split between the liability and equity components of a compound financial instrument is done on issue and is not subsequently revised, even when exercise of the conversion option becomes more likely.

»Ê¹ÚÌåÓýapp company must, on initial recognition

• measure the fair value of the compound instrument as a whole
• measure the fair value of the liability component, and
• assign a value to the equity component by deducting from the fair value of the instrument as a whole the amount separately determined for the liability component.

No gain or loss arises on initial recognition. CFM21270 gives an example of the process.

»Ê¹ÚÌåÓýappreafter, the liability component is measured in accordance with the measurement requirements for financial liabilities of IAS 39 or IFRS 9 (for IFRS or FRS 101 users) and Section 11 and Section 12 (for FRS 102 users who have not adopted the IAS 39 or IFRS 9 policy choice) - i.e. at FVTPL or amortised cost, with changes going through the profit and loss account. On conversion of a convertible, the company derecognises the liability component and recognises it as equity. »Ê¹ÚÌåÓýapp original equity component remains as equity (although it may be transferred from one line item within equity to another). »Ê¹ÚÌåÓýappre is no gain or loss on conversion at maturity.