ABC Ltd. issues 4% 1,00,000 OCPS at a face value of 100 per share on 1st April, 20X1 and these are redeemable after 5 years, ie, on 31st March,…

(a) The OCPS is redeemable at the end of the 5th year. Hence, the preference share contains a liability component. Further the dividend payable on the preference shares is non-cumulative. The holder may also be able to convert the preference shares at his option any time until maturity. Paragraph AG 37 of Ind AS 32, Financial Instruments: Presentation states that non-cumulative dividends paid at the discretion of the issuer entity is part of equity element. Paragraph 29 of Ind AS 32, Financial Instruments: Presentation, requires separate recognition of components of a financial instrument that (a) creates a financial liability of the entity; and (b) grants an option to the holder of the instrument to convert it into fixed number of equity instruments of the entity. From the above paragraphs it is clear that OCPS issued by ABC Ltd. has a financial liability component as well as an equity component, making it a compound financial instrument. Measurement and recognition (Calculations have been done at full scale): At 7% market rate of interest, the fair value of the financial liability component of the OCPS is 71,29,862 [100,000 OCPS x 100 x (1/ (1+7%))5] The fair value of the equity component is (residual value) ₹ 28,70,138 [₹ 1,00,00,000 -71,29,862] Journal Entries ₹ ₹ 1 st April, 20X1 On Initial recognition Bank Dr. 1,00,00,000 To OCPS (Financial liability) 71,29,862 To OCPS (Equity) 28,70,138 (Being OCPS issued and recognised) 31 st March, 20X2 Interest expense – unwinding of discount Interest expense @ 7% (Refer W.N.) Dr. 4,99,090 To OCPS (Financial liability) 4,99,090 (Being interest recorded as per EIR) Interest entry will be passed every year till conversion option is not exercised Whenever the option is exercised by the holder to convert to equity shares OCPS (Financial liability) Dr. Balance on date of exercise of the option To OCPS (Equity) As per paragraph 30, in case of a convertible financial instrument, the classification of the liability and equity components is not revised as a result of change in the likelihood that a conversion option will be exercised. In other words, the amount attributable to equity component on initial recognition shall remain in equity and will not be reclassified even if the OCPS are ultimately redeemed in cash by the issuer. 31 st March, 20X6 If redeemed in cash on maturity ₹ ₹ OCPS (financial liability) (Refer W.N.) Dr. 1,00,00,000 To Bank 1,00,00,000 (Being OCPS redeemed on maturity) Working Note: Calculation of the amortised cost of the financial liability (at full scale): Year Opening Balance (₹) Interest @ 7% Repayment Closing Balance (₹) 1 71,29,862 4,99,090 - 76,28,952 2 76,28,952 5,34,027 - 81,62,979 3 81,62,979 5,71,409 - 87,34,388 4 87,34,388 6,11,407 - 93,45,795 5 93,45,795 6,54,206 10,000,000 -