Compound financial instruments are non-derivative financial
instruments which have both a liability and an equity component. In
accordance with the substance of the contractual arrangements, IAS
32 requires the component parts to be accounted for and presented
separately as financial liabilities, financial assets or equity
instruments.
For example, a bond convertible by the holder into a fixed
number of ordinary shares of the issuing company is a compound
financial instrument. From the perspective of the issuer, such an
instrument comprises two components: a financial liability (a
contractual arrangement to deliver cash or another financial asset)
and an equity instrument (a call option granting the holder the
right, for a specified period of time, to convert it into a fixed
number of ordinary shares of the company). The economic effect of
issuing such an instrument is substantially the same as issuing a
debt instrument with detachable share purchase warrants.
Accordingly, in all cases, the company presents the liability and
equity components separately on its balance sheet.
CFM16190 explains the mechanics of
this.
