Page 25 - 23. COMPILER QB - IND AS 109_32

Year End @ 8% @ 10%
1 0.93 0.91

2 0.86 0.83
3 0.79 0.75
4 0.73 0.68

How will the Company present the above loan notes in the financial statements for the year ended 31 March
2019?
SOLUTION

Step 1 - There is an ‘option’ to convert the loans into equity i.e. the loan note holders do not have to accept
equity shares; they could demand repayment in the form of cash.
Ind AS 32 states that where there is an obligation to transfer economic benefits there should be a liability

recognised. On the other hand, where there is not an obligation to transfer economic benefits, a financial
instrument should be recognised as equity.
In the above illustration we have both – ‘equity’ and ‘debt’ features in the instrument. There is an obligation
to pay cash – i.e. interest at 8% per annum and a redemption amount – this is ‘financial liability’ or ‘debt
component’. The ‘equity’ part of the transaction is the option to convert. So, it is a compound financial

instrument.

Step 2 - Debt element of the financial instrument so as to recognise the liability is the present value of
interest and principal
The rate at which the same is to be discounted, is the rate of equivalent loan note without the conversion
option would have carried interest at 10%, therefore this is the rate to be used for discounting

Step 3 - Calculation of the debt element of the loan note as follows: 8% Interest discounted at a rate of
10% Present Value (6,00,000 x 8%)

S. No Year Interest amount PVF Amount
Year 1 2019 48,000 0.91 43,680
Year 2 2020 48,000 0.83 39,840

Year 3 2021 48,000 0.75 36,063
Year 4 2022 648,000 0.68 4,40,640
Amount to be recognised as a liability 5,60,223

Initial proceeds (6,00,000)
Amount to be recognised as equity 39,777
In year 4, the loan note is redeemed therefore Rs. 6,00,000 + Rs. 48,000 = Rs. 6,48,000.

Step 4 - The next step is to recognise the interest component equivalent to the loan that would carry if there
was no option to cover. Therefore, the interest should be recognised at 10%. As on date Rs. 48,000 has been
recognised in the statement of profit and loss i.e. 6,00,000 x 8% but we have discounted the present value of
future interest payments and redemption amount using discount factors of 10%, so the finance charge in the

statement of profit and loss must also be recognised at the same rate i.e. for the purpose of consistency.
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