treatment of embedded instrument in AS31

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while bifarcating embedded instrument into two,

equity

and financial liability  ,

whether under cashflows repayment of debt by way of issue of convertible shares is considered or not.

Replies (9)

My dear, Where is the flow of cash in the above example ? It is conversion and not payment.

Regards, CA Shakuntala Chhangani

 

exactly Maam,i m agreeing with u . But in examples framed by the Institute in Acconting std 31,

in case of convertible debentures they are taking repayment in the form of shares as there outflow while bifarcating equity and financial liability .

If it is at the time of bifurcation then there will be inflow of cash not the outflow. Can u please exactly tell me where have u seen the example with pg. no., if possible. Hope u will use "M'aam" in ur future communication.

Regards, CA Shakuntala Chhangani

Please mam refer  Pg 33, EX 03 AS 31 at ICAI .ORG

if u give me ur mailing address i will sent it on ur adress.

Thanx maam ,for giving ur so much precious time to me...

i knew mam i m asking for more , can u please explain me why we are considering the present value of Rs 2000000 in example.

 

Just consider the situation that the entity has issued debentures without conversion option. In that case it would have issued the debentures at 9% per annum interest. It is because of conversion option the the debentureholders agree to take 6% interest. It means debt instrument covers value of equity also. In that case its pv would have been as under :

Step I

Year end          interest/principal repayment                   Disc value @ 9%           PV

     1                        1,20,000                                        0.9174                        110092          

     2                        1,20,000                                       0.8417                        101002

     3                        1,20,000                                       0.7722                           92662

                             20,00,000                                       0.7722                       1544367

Fair value of debentures                                                                                   1848123

It means had there been no option of conversion, the debentureholders would have given Rs. 18,48,123 to get the same benefits mentioned above.

Bal as on beginning of year        Interest @ 9%  total payable     interest paid      o/s at year end

1st year 1848123                      166331            2014454          120000            1894454

2nd year 1894454                     170501            2064955          120000            1944955

3rd year 1944955                      175046            2120000          120000            2000000

                                                            Bal repayment             2000000           nil          

Step II :Ascertaining equity component :

Amonut received                                                          Rs. 20,00,000

(-) Fair value of debt                                                     Rs. 18,48,123

Fair value of equity component                          Rs.   1,51,877

This calculation clearly shows that debentureholders have given only Rs. 18,48,123 for debentures and bal has been paid for equity.

Step III :

That is why the entity is required to split the amount received into equity component and debt component by passing the following entry :

Bank A/c                                        Dr. 20,00,000

 To Equity - Reserve                                                                   1,51,877

 To debentures A/c                                                                   18,48,123  

As I said in my previous answer, cash flow will get affected at the time of receipt and not at the time of conversion. If u have any further doubt, revert back to me.

Regards, CA Shakuntala Chhangani 

As the debentures are convertible in shares at the year end so there is no outflow of cash at year end. so why we are calculating PV of Rs. 2000000 at the year end. 

In my above example, nowhere i hv mentioned cash outflow.Again i m repeating that there will be cash inflow at the time of issue of debentures. Bifurcation is done  for the purpose of initial recognition at the time of issue of debentures. debentures will remain a financial liability for a period of three years. then after conversion it will become part of equity. Till now we were recognising equity  only at the time of conversion but after AS 30,31 n 32 become mandatory, we need to recognise equity component at the time of issue of financial liability.

 

thanks maam , i got ur point.

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