Page 436 - SBR Integrated Workbook STUDENT S18-J19

Chapter 25

Example 4

Convertible bond

The bond has characteristics of debt and equity so must be split into a liability
and equity component. The liability component is calculated as the present
value of the cash repayments (discounted using the rate on a similar non-
convertible bond).

Cash flow Discount rate Present value
Date $m $m

31/12/X4 0.3 1/1.06 0.28
31/12/X5 0.3 1/1.06 2 0.27

31/12/X6 10.3 1/1.06 3 8.65
––––––

9.20
––––––

The initial double entry required is:

Dr Cash $10.0m

Cr Liability $9.20m

Cr Equity (bal. fig.) $0.80m

The equity is not remeasured. The liability is then measured at amortised cost:

Bfd Interest at 6% Cash paid* Cfd
$m $m $m $m
9.2 0.55 (0.3) 9.45

In the year ended 31 December 20X4, interest of $0.55 million is charged to
profit or loss. The liability on the statement of financial position is $9.45 million.

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