Convertible Loan Agreement Accounting Treatment

By September 15, 2021 Uncategorized

In this example, it is possible to convert the shares into equity, but there is also an obligation to make cash payments to the creditors of the loan (8% interest). There is also the problem that an equivalent credit voucher would have been paid 10% without the conversion option. Bonds are remunerated at an interest rate of 8%, but since this is only one option, we must, in order to calculate the correct amounts to be recognised in bonds and equity, discount the entire cash flow with an interest rate of 10%. This information makes it possible to calculate the amounts of debt and equity as follows: these 771,000 dollars are the interest rates that the holders are willing to lose to have the opportunity to convert the loan into shares. This is taken as the initial value of the equity item. In this new series of articles, we look at some common errors in the classification of convertible bonds by issuer. (1) The conversion option corresponds to the definition of the derivative instrument, is not clear and closely related and does not qualify for a Scope exception to derivative accounting The total interest to be recognised in the profit or loss account over the three years amounts to USD 2.5 million, i.e. USD 808,000 + USD 833,000 + USD 859,000. This $2.5 million corresponds to all the interest earned by the company over the past three years. This consists of annual payments of $1.5 million ($500,000 per year) and the additional $1 million received (the difference between the $10 million loan and obtaining the $11 million). Companies and their end-users should take note of these changes, as they could have a significant impact on future reporting, in particular for issuers of convertible bonds and other equity-related instruments.

Companies should also consider the impact of the new standard on performance ratios, whether GAAP or NON-GAAP, and other areas of reporting, such as debt compliance. The consequences of early adoption and the method of adoption (modified retrospective and full retrospective) should be understood before the effects of the new guidelines are discussed with stakeholders. . . .