Compound Financial Instruments - Ind AS - Indian Accounting Standards - Companies Law

Compound Financial Instrument The issuer of a non-derivative financial instrument shall evaluate the terms of the financial instrument to determine whether it contains both a liability and an equity component. Such components shall be classified separately as financial liabilities, financial assets or equity instruments. Measurement - The issuer of a bond convertible into ordinary shares first determines the carrying amount of the liability component by measuring the fair value of a similar liability (including any embedded non-equity derivative features) that does not have an associated equity component. The carrying amount of the equity instrument represented by the option to convert the instrument into ordinary shares is then determined by deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole. For Example If an entity has borrowing which has mix features of financial liability equity instruments, then it is known as Compound Financial Instruments (CFI). Treatment of Interest/Dividend or any Gain/Loss Any Interest/dividend income or Gain received on Financial Asset is recognised in Profit or Loss A/c. Any Interest/Dividend Expense or Loss on financial liability is to be recognised in Profit or Loss A/c. Interest/Dividend Expense on equity instruments is to be recognised in retained earnings. Accounting Treatment Following Steps need to follow for accounting of Compound Financial Instrument: - Step 1 - Compound Financial instrument has to measure in initial recognition in 2 parameters Financial Liability Component Equity Instrument Component For Financial Liability Component Present Value of future cash flows in the nature of Financial Liability discounted using market interest rate on similar instruments. For Equity Instrument Component Equity instrument component will be the difference of Initial Issue Price less Financial component as calculated above. Step 2 Allocate transaction cost to financial liability component Equity Instrument Component in their ratio of amount calculated in Step 1. Then, initially recognise financial liability component equity component after deducting such transaction cost. Journal Entry at Initial Recognition for Debenture having nature of compound financial instrument Bank A/c Dr. (Total Proceeds) XXX To Debenture (FL component) XXX To Debenture (Equity component) XXX Step 3 Equity Component is to be carried at Initially recognised value only. Financial Liability Component to be measure at amortised cost method. Step 4 On maturity date If it is converted into Equity Shares Debenture (FL) XXX Debentures (Equity) XXX To Equity Shares Capital XXX To Securities Premium XXX If it is redeemed in cash Debenture (FL) XXX To Bank XXX Debentures (Equity) XXX To Retained earnings XXX