Power-tech Limited issued 50,000, 5-year, 6% convertible debentures on 1 st April, 2023. The debentures have a face value of 100 each. The terms of…

CA Final · Financial Reporting · PYQS · May 2026
Power-tech Limited issued 50,000, 5-year, 6% convertible debentures on 1 st April, 2023. The debentures have a face value of 100 each. The terms of the debentures are as follows: (i) Total Face Value: ₹ 50,00,000 (ii) Coupon Rate is 6% per annum which is payable annually on 31 st March. (iii) Conversion Option: At the maturity date (31 st March, 2028), the debenture holder has the option to convert the debentures into 10 equity shares of Power-tech Limited per debenture. (iv) Prepayment Option (Put Option): The debenture holder has the right to demand early repayment of the debentures at the end of the third year (i.e., on 31 st March, 2026). The prepayment amount will be at a premium of 5% on the face value. (v) Market Interest Rate: The effective market interest rate for a similar non-convertible debenture is 10% per annum. Required: (i) Analyse the nature of instrument and determine whether it contains a liability and an equity component as per Ind AS 32. (ii) Compute the value of the liability component and the equity component on the date of issue (1 st April, 2023) and pass necessary journal entry to record the issue of the debentures.

Suggested Answer and Working Notes:

(a) (i) Nature of instrument As per Ind AS 32, a financial instrument is classified as a compound financial instrument when it contains both a financial liability component and an equity component. In the given case, the convertible debentures contain: (a) Liability component: The company has a contractual obligation to pay annual coupon interest @ 6% and repay debenture amount (with 5% premium if put option is exercised). Hence, it contains a financial liability. (b) Equity component: The debenture holder has an option to convert each debenture into 10 equity shares. Since this is a fixed number of shares for a fixed amount, it satisfies the fixed-for-fixed criterion. Hence, it contains an equity component. Thus, the instrument is a compound financial instrument. (ii) Value of liability and equity component on initial recognition: Since debenture holders can exercise put option after 3 years, liability and equity component should be measured considering cash flows up to 31 st March, 2026 ₹ Present value of interest payments (50,000 debentures x - 100 x 6% x 2.4869) 7,46,070 Present value of redemption amount including 5% premium (₹ 50,00,000 × 105% x 0.7513) 39,44,325 Present value of liability component 46,90,395 Equity component (balancing figure) 3,09,605 Total proceeds 50,00,000 Journal Entry on 1 st April, 2023 Particulars Dr. (₹ ) Cr. (₹ ) Bank A/c Dr. 50,00,000 To Debentures A/c (financial liability component) 46,90,395 To Debentures A/c (equity component) 3,09,605 (Being issue of 50,000 convertible debentures recorded) (iii) Derecognition on exercise of Put Option (31 st March, 2026) Year ended on 31 st March Opening balance a Finance cost @10% b = a x 10% Interest @ 6% c = 50,00,000 x 6% Closing balance d = a+b-c 2024 46,90,395 4,69,040 3,00,000 48,59,435 2025 48,59,435 4,85,944 3,00,000 50,45,379 2026 50,45,379 5,04,621* 3,00,000 52,50,000 The difference of 83 (5,04,621-5,04,538) is due to rounding off. Treatment of Equity Component As per Ind AS 32, equity component is not reclassified to profit or loss. It is transferred within equity (generally to retained earnings). Journal Entry on 31 st March, 2026 Particulars Dr. (₹ ) Cr. (₹ ) Debentures A/c (financial liability component) Dr. 52,50,000 Debentures A/c (equity component) Dr. 3,09,605 To Bank A/c 52,50,000 To Retained Earnings (General Reserve) A/c 3,09,605 (Being debentures redeemed on exercise of put option and equity component transferred within equity)

Topics: Ind AS 109, General

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