Page 7 - 30. COMPILER QB - IND AS 101

Increase in the value of Land due to remeasurement at 5.5
fair value
Increase in the value of investment due to remeasurement 0.75
at fair value 6.25
Equity as on 1stApril, 20X1 after transition to Ind AS 182.03

Q4. (May 20)
On April 1, 20X1, Sigma Ltd. issued 30,000 6% convertible debentures of face value of Rs 100 per debenture at
par. The debentures are redeemable at a premium of 10% on March 31, 20X5 or these may be converted into

ordinary shares at the option of the holder. The interest rate for equivalent debentures without conversion
rights would have been 10%. The date of transition to Ind AS is April 1, 20X3.
Suggest how Sigma Ltd. should account for this compound financial instrument on the date of transition.
The present value of Re. 1 receivable at the end of each year based on discount rates of 6% and 10% can be

taken as:
End of year 6% 10%
1 0.94 0.91
2 0.89 0.83
3 0.84 0.75
4 0.79 0.68
SOLUTION

The carrying amount of the debenture on the date of transition under previous GAAP, assuming that all
interest accrued other than premium on redemption have been paid, will be Rs. 31,50,000 [(30,000 x 100) +
(30,000 x 100 x 10/100 x 2/5)]. The premium payable on redemption is being recognised as borrowing costs as
per AS 16 i.e. under previous GAAP on a straight-line basis.
Ind AS 32, ‘Financial Instruments: Presentation’, requires an entity to split a compound financial instrument

at inception into separate liability and equity components. If the liability component is no longer outstanding,
retrospective application of Ind AS 32 would involve separating two portions of equity. The first portion is
recognised in retained earnings and represents the cumulative interest accreted on the liability component. The
other portion represents the original equity component. However, in accordance with Ind AS 101, a first-time
adopter need not separate these two portions if the liability component is no longer outstanding at the date
of transition to Ind AS.

In the present case, since the liability is outstanding on the date of transition, Sigma Ltd. will need to split
the convertible debentures into debt and equity portion on the date of transition. Accordingly, we will first
measure the liability component by discounting the contractually determined stream of future cash flows
(interest and principal) to present value by using the discount rate of 10% p.a. (being the market interest

rate for similar debentures with no conversion option).
Rs
Interest payments p.a. on each debenture 6
Present Value (PV) of interest payment on each debenture for years 1 to 4 (6 x
3.17) (Note 1) 19.02
PV of principal repayment on each debenture (including premium) 110 x 0.68
(Note 2) 74.80
Total liability component on each debenture (A) 93.82
30. 6