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AASB 132: 15
Preference shares classified as a liability:
- AASB 132: 18 (a)
- AASB 132:19
- Preference shares classified as equity:
- AASB 132: AG25
Calculate PV of principal:
FV= 8,000,000; n=4; i=10%
8,000,000 x 0.683 = 5,464,000
Calculate PV of interest:
A=640,000; n=4; i=10%
640,000 x 3.170 = 2,028,800
Calculate the liability component:
5,464,000 + 2,028,800 = 7,492,800
Step 2. Calculate the equity component
The difference between the proceeds of the note issue and the
liability is then assigned to the equity component.
- When market rate is greater than note rate, the
option has a positive value
- When market rate is less than note rate, the
option has no value today
8,000,000
Share capital
8,507,200
(AG32. On conversion of a convertible instrument at maturity, the
entity 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.)
Scenario 3. Assume notes are redeemed at maturity 30 June
2014:
Convertible notes (liability)
8,000,000
Cash
8,000,000
Convertible notes option (equity) 507,200
Retained earnings
507,200
This means the option is worthless out of the money so the option
lapses, the noteholder loses and the company in effect gains to
the value of the option reflecting the interest differential
An entity issues 2 million dollars convertible notes on 1 July 2011.
The notes have a 3-year term. Interest is payable annually at a rate
of 7% pa. Each note is convertible into one ordinary share at or
before maturity. At the time of issue, the prevailing market interest
rate for a similar debt instrument without a conversion option is 9%
pa.
Prepare all journal entries, assuming the notes were converted after
second interest payment on 30 June 2013.
Step 1. Calculate the PV of the liability component
PV of principal: 2,000,000 x 0.772 =
1,544,000
PV of interest: 140,000 x 2.531 =
354,340
1,898,340
Step 2. Calculate the equity component
2,000,000 1,898,340 = 101,660
Step 3 Record the issue of note
Issue 1 July 2011:
Cash
2,000,000
Convertible notes (liability)
Convertible notes option (equity)
1,898,340
101,660