Page 29 - 23. COMPILER QB - IND AS 109_32

Market Rate for Similar Instrument 15%
Transaction Cost 30,000
Face value of equity share after conversion 10
Number of Equity shares to be issued 5,000
Effective interest rate 15.86%
You are required to compute the liability and equity component and pass journal entries for entire term of

arrangement i.e. from the issue of preference shares till their conversion into equity shares keeping in view the
provisions of relevant Ind AS
SOLUTION

This is a compound financial instrument with two components – liability representing present value of future
cash outflows and balance represents equity component.
a. Computation of Liability & Equity Component
Date Particulars Cash Flow Discount Net present

Factor Value
01-Apr-20X1 0 1 0.00
31-Mar-20X2 Dividend 150,000 0.869565 130,434.75

31-Mar-20X3 Dividend 150,000 0.756144 113,421.6
31-Mar-20X4 Dividend 150,000 0.657516 98,627.4
31-Mar-20X5 Dividend 150,000 0.571753 85,762.95

31-Mar-20X6 Dividend 150,000 0.497177 74,576.55
Total Liability Component 502,823.25
Total Proceeds 1,500,000.00

Total Equity Component (Bal fig)
997,176.75

b. Allocation of transaction costs

Particulars Amount Allocation Net Amount
Liability Component 502,823 10,056 492,767
Equity Component 997,177 19,944 977,233

Total Proceeds 1,500,000 30,000 1,470,000

c. Accounting for liability at amortised cost:
- Initial accounting = Present value of cash outflows less transaction costs

- Subsequent accounting = At amortised cost, i.e., initial fair value adjusted for interest and repayments of
the liability.
Assume the effective interest rate is 15.86%
Opening Interest Cash Flow Closing

Financial B C Financial
Liability A Liability
A+B-C
01-Apr-20X1 492,767 - - 4,92,767

31-Mar-20X2 492,767 78,153 150,000 4,20,920
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