Convertible debentures

[Krishna]

An entity A has invested in 0.01% convertible debentures in entity C. These debentures are to be converted into equity shares if entity C at 1:1 ratio at the end of 10th year.

Considering the above scenario, there is guidance available from Issuer point of view ( i.e., entity C). How should entity A (holder) recognize and classify this instrument (i.e., whether investment in Equity or Debt)

Thanks in Advance

[Marek Muc]

Could you explain why the interest rate has been established at a mere 0.01%?

[Krishna]

Interest rate was kept at minimum as the intention was to obtain financing initially by way of CCD without diluting the current owner ship % till the conversion period.

[Marek Muc]

The guidance for the issuer is here: https://ifrscommunity.com/knowledge-bas ... nstruments
Since the liability part is negligible, you'll end up recognising virtually all proceeds as equity. For the same reason, in my opinion, you can classify it into FVOCI category without recycling https://ifrscommunity.com/knowledge-bas ... -recycling.

[Krishna]

This guidance helps, but can you share if there is any explicit guidance from Holder perspective ?

[Marek Muc]

Holder applies general classification criteria (linked to in my previous post)

[hubertd]

Holder applies general classification criteria (linked to in my previous post)

The question was if the convertible note with the given fact patter would be debt or equity instrument for a holder. I cannot tell applying the general classification criteria if this is equity or debt instrument. How exactly would one apply it? Is it an equity instrument which can be valued at fair value through profit or loss or alternatively elected as FVOCI or a debt instrument that must be valued through fair value through profit or loss? Would we first look from an issuer perspective and once we establish what the instrument is from an issuer perspective then we apply this classification for a holder and account for it accordingly? It's confusing.

[Leo]

The convertible debt from the holder's perspective should first be assessed against SPPI test. If it fails SPPI, it goes to FVPL. It looks like a debt instrument that fails the SPPI test, I would classify it as FVPL.

The OCI option is either available for equity instrument or debt instrument that passes the SPPI test. I would guess that the convertible note is a debt instrument because the entity cannot avoid delivering cash, and the conversion feature is an option instead of a mandatory conversion.