Solution

IAS 32 requires that the amount paid (of $ 11 Lakhs) is split by the same method as is used in the initial recording. However, at 30 June 2020, the interest rate has changed. At that time, D Limited could have issued a one-year (i.e. maturity 30 June 2021) non-convertible instrument at 5%.

The split will be made as below

Particulars

Amount

Present value of principal payable at 30 June 2021 in one year’s time ($ 10 Lakhs discounted at 5% for one year)

9,52,381

Present value of interest payable ($ 60,000 discounted at 5% for one year)

57,142

Total liability component

10,09,523

Consideration paid

11,00,000

Residual – equity component

90,477

Accordingly, the difference between consideration allocated to liability component ($ 10,09,523) less carrying amount of financial liability on date of redemption i.e. 30 June 2020 ($ 9,72,476), amounting to $ 37,047 is recognized in profit or loss.

The residual i.e. consideration allocated to equity component is debited to equity.

An entity may amend the terms of a convertible instrument to induce early conversion, for example by offering a more favourable conversion ratio or paying other additional consideration in the event of conversion before a specified date.

The difference, at the date the terms are amended, between:

a)        the fair value of the consideration the holder receives on conversion of the instrument under the revised terms and

b)        the fair value of the consideration the holder would have received under the original terms is recognized as a loss in profit or loss.