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 be settled by an entity delivering a fixed number of its own equity instruments in exchange for a fixed amount of foreign currency are treated as a liability as per IFRS 9. Accordingly, contracts which include a conversion option in a foreign currency denominated convertible bond are liabilities. A derivative contract which involves an entity delivering a fixed number of its own equity instruments in exchange for a fixed amount of foreign currency fails the ‘fixed for fixed test’ and be classified as liability. However, as per the carveout mentioned in Ind AS 32, an exception is provided to the definition of ‘financial liability’. Accordingly, equity conversion option embedded in a convertible bond denominated in foreign currency to acquire a fixed number of entity’s own equity instruments is considered as equity instrument if the exercise price is fixed in any currency. A convertible bond denominated in foreign currency to acquire a fixed number of entity’s own equity instruments may result in issuing a variable number of its own equity instrument depending upon the exchange rate at the time of conversion. In spite of this, such FCCB would be considered as equity instrument pursuant to the carveout provided as mentioned above. The liability and equity component will be split accordingly.
