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obtained at the time of initially accounting for that loan.
The accounting treatment is to be done as per above guidance and the advice which the company has been
provided is not in line with the requirements of Ind AS 101.

Q41. (July 21 – 5 Marks)

On 1st October, 2017 Axe Limited issued preference shares to B Limited for a consideration of Rs 18 lakh. The
holder has an option to convert these preference shares to a fixed number of equity instruments of the issuer
any time up to a period of 4 years. If the holder does not exercise the option, the preference shares are
redeemable at the end of 4 years. The preference shares carry a fixed coupon of 5.5% per annum and are
payable every year. The prevailing market rate for similar preference shares without the conversion feature is

8% per annum.
Axe Limited has an early redemption option to prepay the instrument at Rs 20 lakh and on 30th September,
2020, it exercised that option. The interest rate has changed on that date.
At that time, Axe Limited could have issued a 1 year (that is maturity 30th September, 2021) non-convertible
instrument at 6%.
Calculate the value of liability and equity components at the date of initial recognition. Also give an

amortization schedule.
(Limit discounting factor to 3 decimal places for calculation purpose).
SOLUTION

The values of the liability and equity components are calculated as follows:
Present value of principal payable at the end of 4 years (Rs Rs 13,23,000
18,00,000 discounted at 8% for 4 years i.e. Rs 18,00,000 x 0.735)

Present value of interest payable in arrears for 4 years (Rs
99,000 (Rs 18,00,000 x 5.5%) discounted at 8% for each of 4
years (i.e. Rs 99,000 x 3.312)) Rs 3,27,888

Total financial liability Rs 16,50,888
Consideration amount (Rs 18,00,000)
Residual – equity component Rs 1,49,112

Therefore, equity component = fair value of compound instrument, say, Rs 18,00,000 less financial liability
component i.e. Rs 16,50,888 = Rs 1,49,112.
The amortisation schedule of the instrument is set out below:
Dates Cash flows Finance cost at effective Liability

interest rate
1st October 2017 18,00,000 - 16,50,888
30th September 2018 (99,000) 1,32,071 16,83,959

30th September 2019 (99,000) 1,34,717 17,19,676
30th September 2020 (99,000) 1,37,574 17,58,250
30th September 2021 (18,99,000) 1,40,750* -

*Note: The difference in the amount of finance cost is due to the approximation of discounting factor to 3
decimal places.

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