CFM16190 - Accounting for financial instruments: IAS 32 and IAS 39: treatment of compound financial instruments

Accounting for compound financial instruments

The 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.

The 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. CFM16190a gives an example of the process.

Thereafter, the liability component is measured at 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. The original equity component remains as equity (although it may be transferred from one line item within equity to another). There is no gain or loss on conversion at maturity.