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How to Account for Convertible Debt (IFRS)

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How to Account for Convertible Debt (IFRS)

29,092 views September 25, 2020 7:23

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The accounting for convertible debt under International Financial Reporting Standards (IFRS) differs significantly from the accounting per U.S. GAAP. Per IFRS, convertible debt is bifurcated (split) into 2 components: a debt component and an equity component (the conversion feature is treated as an option and thus equity).

First, you need to calculate the fair value of the liability component as of the issuance date. You do this by computing the present value of the bond's face value (the amount the borrower promised to repay) plus the present value of the bond's interest payments. You then subtract the sum of these two numbers from the fair value of the convertible debt as a whole (this is simply the amount the borrower received for the convertible debt) and the residual amount is the value of the equity component. Here's the equation again:

fair value of convertible debt - fair value of liability component = equity component

You then record a bond discount and set up an effective interest table to amortize the bond discount over time.
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About this tutorial

Edspira published this 7:23 video tutorial on September 25, 2020. It has been watched 29,092 times on YouTube.

Channel
Edspira
Category
Education
Duration
7:23
Published
September 25, 2020
Views
29,092
Likes
255

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Further reading

  • Accounting For Convertible Bonds | Accounting-Simplified.com accounting-simplified.com

    Prior to introduction of IAS 32, IAS 39 and IFRS 9, entities used to account for compound debt instruments in a similar way to ordinary financial liabilities, i.e. a liability was recorded for the entire amount of proce…

  • Accounting For Convertible Debt - Examples - Financial Memos financialmemos.com

    The accounting for convertible debt presents a number of accounting challenges, in both conceptually and the journal entries required. In this article, part of our accounting tutorial series, we set out what these chall…

  • Accounting for Convertible Bonds & Debt (with Examples) wallstreetmojo.com

    Accounting for Convertible Bonds & Debt. Accounting for Convertibles refers to the accounting of the debt instrument that entitles or provide rights to the holder to convert its holding into a specified number of issuin…

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