Page 17 - 23. COMPILER QB - IND AS 109_32

MTPs QUESTIONS

Q11 (August 18 – 10 Marks)
i) On 1 January 2018, Entity X writes a put option for 1,00,000 of its own equity shares for which it received

a premium of Rs. 5,00,000.
Under the terms of the option, Entity X may be obliged to take delivery of 1,00,000 of its own
shares in one year’s time and to pay the option exercise price of Rs. 22,000,000. The option can

only be settled through physical delivery of the shares (gross physical settlement). Examine the
nature of the financial instrument and how it will be accounted assuming that the present value
of option exercise price is Rs. 20,00,000?

ii) On 1st April, 2014, S Ltd. issued 5,000, 8% convertible debentures with a face value of Rs. 100
each maturing on 31st March, 2019. The debentures are convertible into equity shares of S Ltd. at

a conversion price of Rs. 105 per share. Interest is payable annually in cash. At the date of issue,
S Ltd. could have issued non-convertible debentures with a 5 year term bearing a coupon interest
rate of 12%. On 1st April, 2017, the convertible debentures have a fair value of Rs. 5,25,000. S

Ltd. makes a tender offer to debenture holders to repurchase the debentures for Rs. 5,25,000,
which the holders accepted. At the date of repurchase, S Ltd. could have issued non-convertible
debt with a 2 years term bearing a coupon interest rate of 9%.

Examine the accounting treatment in the books of S Ltd., by passing appropriate journal entries, for
recording of equity and liability component:

(1) At the time of initial recognition and
(2) At the time of repurchase of the convertible debentures.
The following present values of Re. 1 at 8%, 9% & 12% are supplied to you:

Interest Rate Year 1 Year 2 Year 3 Year 4 Year 5
8% 0.926 0.857 0.794 0.735 0.681

9% 0.917 0.842 0.772 0.708 0.650
12% 0.893 0.797 0.712 0.636 0.567
SOLUTION

i) This derivative involves Entity X taking delivery of a fixed number of equity shares for a fixed amount of
cash. Even though the obligation for Entity X to purchase its own equity shares for Rs. 22,000,000 is

conditional on the holder of the option exercising the option, Entity X has an obligation to deliver cash
which it cannot avoid.
As per para 23 of Ind AS 32 ‘Financial Instruments: Presentation’, the accounting for financial instrument
will be as below:
● The financial liability is recognised initially at the present value of the redemption amount, and is
reclassified from equity. This would imply that a financial liability for an amount of present value of

Rs. 22,000,000, say Rs. 20,000,000 will be recognised through a debit to equity. The initial premium
received (Rs. 5,00,000) is credited to equity.

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