25 May 2021
Hi What would be treatment of optionally convertible debentures at the option of Issuer as per Ind AS? Also how would these be treated for calculation of Diluted EPS if the conversion is based on NAV of shares of the company at the end of duration of debenture?
09 July 2024
Under Ind AS (Indian Accounting Standards), the treatment of optionally convertible debentures (OCDs) at the option of the issuer depends on the specific terms and conditions laid out in the debenture agreement. Here’s how OCDs are generally treated under Ind AS:
### Treatment of Optionally Convertible Debentures (OCDs):
1. **Initial Recognition:** - Upon issuance, OCDs are recognized as debt in the financial statements of the issuer, typically classified under financial liabilities.
2. **Interest Expense:** - Interest payments made on OCDs are recognized as finance costs in the profit and loss statement unless the terms of the debenture provide for equity classification.
3. **Subsequent Measurement:** - OCDs are measured at amortized cost using the effective interest method, unless they qualify for equity classification.
4. **Equity Classification:** - If the OCDs meet the conditions for equity classification under Ind AS 32 (Financial Instruments: Presentation), they are treated as equity instruments. - Equity classification generally occurs when there is a fixed conversion ratio into equity shares or if the conversion is based on a variable that is not within the control of the issuer (such as the NAV of shares).
5. **Accounting for Conversion:** - Upon conversion, if OCDs are classified as equity, there is no impact on the profit and loss statement. The equity component is recognized directly in equity. - If OCDs are not classified as equity and are debt until conversion, they are derecognized from liabilities upon conversion, and any difference between the carrying amount of the debt component and the fair value of the equity component is recognized in profit or loss.
### Treatment for Calculation of Diluted EPS:
- **Impact of Conversion Based on NAV:** - If the conversion of OCDs is based on the Net Asset Value (NAV) of shares at the end of the debenture's term, the potential dilutive effect on EPS (Earnings Per Share) needs to be assessed. - Ind AS 33 (Earnings Per Share) requires that potentially dilutive instruments, including OCDs, be considered in the calculation of diluted EPS. - Diluted EPS is calculated by adjusting the numerator (profit attributable to equity shareholders) and the denominator (weighted average number of equity shares outstanding) for the potential dilutive effect of OCDs if converted.
### Key Considerations:
- **Equity vs. Liability Classification:** The classification of OCDs as either debt or equity impacts their accounting treatment and the financial statements' presentation. - **NAV-based Conversion:** If conversion is based on NAV, the potential number of shares that would be issued upon conversion is determined based on the NAV per share at the end of the debenture's term. - **Disclosure Requirements:** Ind AS requires comprehensive disclosure of the terms and conditions of OCDs, their classification, and the potential impact on financial position and performance.
In summary, the treatment of OCDs under Ind AS depends on their classification as either debt or equity, which is determined by the specific terms and conditions of the debenture agreement. For diluted EPS calculation, potential conversion based on NAV is factored into the denominator of the EPS calculation to reflect the potential dilution effect on existing shareholders.
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