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.

Own use exemption as per the Accounting Standard

Own use exemption as per the Accounting Standard What is meant by own use exemption as per the Accounting Standard? Contracts that are entered into for the purpose of the receipt or delivery of a non-financial item for the entity’s own use is excluded from the scope of Accounting Standards…

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Criteria for classifying as either financial liability or equity

Criteria for classifying as either financial liability or equity What is the core criteria while classifying a financial instrument as either financial liability or equity? The core criteria while classifying a financial instrument is to examine whether there exists a future obligation on the part of the entity to part…

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Contract is settled through the entity’s own equity instrument

Contract is settled through the entity’s own equity instrument When a contract is settled through the entity’s own equity instrument, can it be regarded as equity? A contract that will be settled by the entity receiving or delivering a fixed number of its own shares for no future consideration or…

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Consequences of treating equity vs liability

Consequences of treating equity vs liability What are the consequences of treating a contract as equity and how its treatment is different if treated as liability? The consequences of treating particular contract as equity are as follows: Treatment when the financial instrument is equity: Any consideration received (such as the…

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Classification of Foreign Currency Convertible Bond (FCCB)

Classification of Foreign Currency Convertible Bond (FCCB) An entity has issued a foreign currency convertible bond (FCCB). The Bond is denominated in foreign currency and would be converted into a fixed number of equity shares. Will this be treated as equity instrument or as a financial liability? Contracts that will…

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What are treasury shares and how are these presented

What are treasury shares and how are these presented What are treasury shares and how are these presented in the financial statements? If an entity acquires its own equity instruments, these instruments are known as ‘treasury shares’ and are deducted from equity. No gain or loss shall be recognised in…

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