Bifurcation of compound financial instruments

Bifurcation of compound financial instruments

Should the entity monitor a compound financial instrument in bifurcating such instrument into liability and equity component constantly and account for the same on every reporting period?

A compound financial instrument should be evaluated for the terms of the financial instrument to determine whether it contains both a liability and an equity component. Each component should be classified separately as financial liabilities, financial assets or equity instruments.

An entity should recognise separately the components of a financial instrument that:

  1. creates a financial liability of the entity; and
  2. grants an option to the holder of the instrument to convert it into an equity instrument of the entity.

Classification of the liability and equity components of a convertible instrument is not revised as a result of a change in the likelihood that a conversion option will be exercised, even when exercise of the option may appear to have become economically advantageous to some holders.

Ind AS Accounting Standards