Document ID: chunk:federal_register_of_legislation:F2023C00406:body:0:p60
Version: federal_register_of_legislation:F2023C00406
Segment Type: other
Provision Reference: 
Character Range: 155778–159809

A issued a 10 per cent convertible debenture with a face value of CU1,000 maturing on 31 December 20X9. The debenture is convertible into ordinary shares of Entity A at a conversion price of CU25 per share. Interest is payable half-yearly in cash. At the date of issue, Entity A could have issued non-convertible debt with a ten-year term bearing a coupon interest rate of 11 per cent.
IE41 In the financial statements of Entity A the carrying amount of the debenture was allocated on issue as follows:
                                                                                     CU
Liability component
Present value of 20 half-yearly interest payments of CU50, discounted at 11%         597
Present value of CU1,000 due in 10 years, discounted at 11%, compounded half-yearly  343
                                                                                     940
Equity component
(difference between CU1,000 total proceeds and CU940 allocated above)                60
Total proceeds                                                                       1,000

IE42 On 1 January 20X5, the convertible debenture has a fair value of CU1,700.
IE43 Entity A makes a tender offer to the holder of the debenture to repurchase the debenture for CU1,700, which the holder accepts. At the date of repurchase, Entity A could have issued non-convertible debt with a five-year term bearing a coupon interest rate of 8 per cent.
IE44 The repurchase price is allocated as follows:
                                                                                                                                                     Carrying value     Fair value     Difference
Liability component:                                                                                                                                 CU                 CU             CU
Present value of 10 remaining half-yearly interest payments of CU50, discounted at 11% and 8%, respectively                                          377                405
Present value of CU1,000 due in 5 years, discounted at 11% and 8%, compounded half-yearly, respectively                                              585                676
                                                                                                                                                     962                1,081          (119)
Equity component                                                                                                                                     60                 619(a)         (559)
Total                                                                                                                                                1,022              1,700          (678)

  (a) This amount represents the difference between the fair value amount allocated to the liability component and the repurchase price of CU1,700.

IE45 Entity A recognises the repurchase of the debenture as follows:

Dr  Liability component                       CU962
Dr  Debt settlement expense (profit or loss)  CU119
    Cr                                        Cash      CU1,081

To recognise the repurchase of the liability component.

Dr  Equity  CU619
    Cr      Cash      CU619

To recognise the cash paid for the equity component.
IE46 The equity component remains as equity, but may be transferred from one line item within equity to another.

Example 12: Amendment of the terms of a convertible instrument to induce early conversion
IE47 The following example illustrates how an entity accounts for the additional consideration paid when the terms of a convertible instrument are amended to induce early conversion.
IE48 On 1 January 20X0, Entity A issued a 10 per cent convertible debenture with a face value of CU1,000 with the same terms as described in Example 11. On 1 January 20X1, to induce the holder to convert the convertible debenture promptly, Entity A reduces the conversion price to CU20 if the debenture is converted before