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:
- creates a financial liability of the entity; and
- 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.