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Financial instruments

Compound instruments

3.1 Substance over form

A compound instrument is one that has characteristics of both a
financial liability and equity. A common example is the issue of a bond
that allows the holders to ask for redemption in the form of cash or a
fixed number of equity shares.

IAS 32 specifies that compound instruments must be split into:

 a liability component (the obligation to repay cash)

 an equity component (the obligation to issue a fixed number of shares).

3.2 Split accounting

The split of the liability component and the equity component at the issue date is
calculated as follows:

 the liability component is the present value of the cash repayments, discounted
using the market rate on non-convertible bonds

 the equity component is the difference between the cash received and the
liability component at the issue date.

After initial recognition, the liability will be measured at amortised cost. The equity
component remains unchanged.

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