Recognition & measurement of a convertible loan given
Recognition & measurement of a convertible loan given
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?
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?
Re: Recognition & measurement of a convertible loan given
https://images.template.net/wp-content/ ... -notes.pdf
if that link works, have a look and see if you get anywhere
if that link works, have a look and see if you get anywhere
Re: Recognition & measurement of a convertible loan given
Thank you, but the whole document only for an issuer, nothing for a holder
Re: Recognition & measurement of a convertible loan given
oh wrong link then, there's a link floating on this site somewhere, will find
Re: Recognition & measurement of a convertible loan given
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 !
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 !
Re: Recognition & measurement of a convertible loan given
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
Re: Recognition & measurement of a convertible loan given
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
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
Re: Recognition & measurement of a convertible loan given
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
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
Re: Recognition & measurement of a convertible loan given
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.
Re: Recognition & measurement of a convertible loan given
Yes, but in principle there shouldn't be any further variation in fair value other than accounting for the repaymentLeo 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 ?
Re: Recognition & measurement of a convertible loan given
Thanks Marek, if the market interest rate changes, there might be a variation in the fair value as well I think. Would you agree ?
Re: Recognition & measurement of a convertible loan given
Yep, lots of factors will impact the fair value
Re: Recognition & measurement of a convertible loan given
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.
Re: Recognition & measurement of a convertible loan given
Yep, deferred tax accounting will be inevitable
Re: Recognition & measurement of a convertible loan given
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?
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?
Re: Recognition & measurement of a convertible loan given
Hi, please start a new topic and describe your scenario, thanks