QUESTION 25 Illustration 15: Conversion into a fixed number of equity instruments DF Limited issues convertible debentures to JL Limited for a subscription amount of $ 100 crores. Those debentures are convertible after 5 years into 15 Crore equity shares of $ 10 each. Examine the nature of the financial instrument.

Solution

This contract is an equity instrument because changes in the fair value of equity shares arising from market related factors do not affect the amount of cash or other financial assets to be paid or received, or the number of equity instruments to be received or delivered.

Since the number of equity shares to be issued upon conversion is fixed, and changes in the fair value of equity shares do not affect the amount of cash or other financial assets to be paid or received, or the number of equity instruments to be received or delivered, the instrument meets the definition of an equity instrument under IAS 32.

Therefore, the convertible debentures in this example can be classified as equity instruments and are recognized as such in the balance sheet of DF Limited. Upon conversion, the equity shares are issued to JL Limited and the liability component is extinguished.






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