Recognition & measurement of a convertible loan given

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Jonson_Y
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Recognition & measurement of a convertible loan given

Post by Jonson_Y »

Dear group members! Could provide me a tip on the following from a holder perspective:
I need a correct accounting treatment of a 2 years convertible loan given to privately owned 3rd party with interest of 7% (close to market rate) payable at the end of 2year.
The Holder has the option to convert the loan to equity shares (5% of all equity shares). If the conversion is happend the interest is assumed to be 0% and no need to pay it.
My preliminary view the contract is a FVTPL instrument.
I have no idea whether the holder should accue interest in year1 if currenty there are no clarity on exersising the option?
If there's no active market for this loan and the issuer is privately owned is to obtain future cashflow projections to get the FV at the year end the only option for FV?
JRSB
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Re: Recognition & measurement of a convertible loan given

Post by JRSB »

https://images.template.net/wp-content/ ... -notes.pdf

if that link works, have a look and see if you get anywhere
Jonson_Y
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Re: Recognition & measurement of a convertible loan given

Post by Jonson_Y »

Thank you, but the whole document only for an issuer, nothing for a holder
JRSB
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Re: Recognition & measurement of a convertible loan given

Post by JRSB »

oh wrong link then, there's a link floating on this site somewhere, will find
Leo
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Re: Recognition & measurement of a convertible loan given

Post by Leo »

Hi Jonson_Y,

I agree with your analysis, the SPPI requires only "basic lending arrangement". In a convertible loan, the interest incorporate the option of converting the loan into equity (the value of the equity), and it's exposed to uncertainties (whether it'll be converting or not at maturity).

I would say, almost always carried at fair value through profit or loss.

However, there might be some exceptions, if anyone's encountered convertible loan classified as amortised costs, would you please share an example ? thanks !
Jonson_Y
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Re: Recognition & measurement of a convertible loan given

Post by Jonson_Y »

Thank you! So many guidance on an issuer accounting and almost nothing for an holder. I found in PwC Illustative FS the following which totaly supports your advice Leo
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Marek Muc
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Re: Recognition & measurement of a convertible loan given

Post by Marek Muc »

There's much less guidance for holders probably because such intruments clearly fail the SPPI test and you always end up with FVTPL classification.

You don't recognise interest income for FVTPL instruments:
https://ifrscommunity.com/knowledge-bas ... est-income

So the only difficulty is with proper fair value measurement
Leo
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Re: Recognition & measurement of a convertible loan given

Post by Leo »

Thank you Marek for this clarification.

So if my understanding is correct, when the company receives the cash from interest of the period, they can book it directly against the principle amount of the asset in the balance sheet and later on, perform the fair value measurement of this asset and the variation goes to P&L in the corresponding line right ?

Thanks
Jonson_Y
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Re: Recognition & measurement of a convertible loan given

Post by Jonson_Y »

in my case they have a condition to pay interest only if there is no conversion (at the end of year 2) so no cash recieved during the period.
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Marek Muc
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Re: Recognition & measurement of a convertible loan given

Post by Marek Muc »

Leo wrote: 06 Apr 2022, 10:54 So if my understanding is correct, when the company receives the cash from interest of the period, they can book it directly against the principle amount of the asset in the balance sheet and later on, perform the fair value measurement of this asset and the variation goes to P&L in the corresponding line right ?
Yes, but in principle there shouldn't be any further variation in fair value other than accounting for the repayment
Leo
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Re: Recognition & measurement of a convertible loan given

Post by Leo »

Thanks Marek, if the market interest rate changes, there might be a variation in the fair value as well I think. Would you agree ?
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Marek Muc
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Re: Recognition & measurement of a convertible loan given

Post by Marek Muc »

Yep, lots of factors will impact the fair value
JRSB
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Re: Recognition & measurement of a convertible loan given

Post by JRSB »

It's conceptually interesting that everything gets wrapped up in the FV movement (including for tax purposes which might treat interest and accounting gain/loss differently) but makes sense in some ways.
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Marek Muc
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Re: Recognition & measurement of a convertible loan given

Post by Marek Muc »

Yep, deferred tax accounting will be inevitable
Tre-Lois
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Re: Recognition & measurement of a convertible loan given

Post by Tre-Lois »

Hi all. How would the treatment proposed above differ if instead of receiving 5% of equity, we receive 25% equity (meaning, if the conversion happens, it would be an associate under IAS 28).
Would we still initially recognize the asset as a financial asset measured at FVTPL? If so, what would the subsequent treatment be when the conversion happens? Derecognize the financial asset and recognize an equity accounted investment?
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Marek Muc
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Re: Recognition & measurement of a convertible loan given

Post by Marek Muc »

Hi, please start a new topic and describe your scenario, thanks
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