Page 44 - 23. COMPILER QB - IND AS 109_32

Year Future cash flow Discounting Present value (in
(in lakh) factor @ 12% lakh)

4 12 0.636 7.632
5 120+12=132 0.567 74.844
111.288

The fair value of the transaction is Rs111.288 lakh.
Since fair value is based on level 1 input or valuation technique that uses only data from observable markets,
difference between fair value and transaction price will be recognized in Profit and Loss as fair value loss i.e.
Rs120 lakh– Rs111.288 lakh= Rs 8.712 lakh.

Note: One may also calculate the above fair value by the way of annuity on interest amount rather than
separate calculation

Q29 (Nov 18 - 8 Marks)

Veer Limited issues convertible bonds of Rs75,00,000 on 1st April, 2018. The bonds have a life of five years
and a face value of Rs20 each, and they offer interest payable at the end of each financial year at a rate of

4.5 percent annum. The bonds are issued at their face value and each bond can be converted into one ordinary
share in Veer Ltd at any time in the next five years. Companies of a similar risk profile have recently issued
debt at 6 percent per annum with similar terms but without the option for conversion.
You are required to:
(i) Provide the appropriate accounting entries for initial recognition as per the relevant Ind AS in the books
of the company.

(ii) Calculate the stream of interest expenses across the five years of the life of the bonds.
(iii) Provide the accounting entries if the holders of the bonds elect to convert the bonds to ordinary shares
at the end of the fourth year.
SOLUTION

Present value of bonds at the market rate of debt
Present value of principal to be received in 5 years discounted at 6% (75,00,000 x 0.747) = 56,02,500
Present value of interest stream discounted at 6% for 5 years (3,37,500 x4.212) = 14,21,550

Total present value = 70,24,050
Equity component = 4,75,950
Total face value of convertible bonds = 75,00,000

(i) Journal Entries

Dr. Amount Cr. Amount
(Rs) (Rs)
1st April, 2018
Cash Dr. 75,00,000

To Convertible bonds (liability) 70,24,050
To Convertible bonds (equity component) 4,75,950
(Being entry to record the convertible bonds and the

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