On 1st April, 2X01, A Ltd. issued a 10% convertible debenture with a face value of ₹ 1,000 maturing on 31st March, 2X11. The debenture is…
CA Final · Financial Reporting · MTP · November 2026
On 1st April, 2X01, A Ltd. issued a 10% convertible debenture with a face value of ₹ 1,000 maturing on 31st March, 2X11. The debenture is convertible into equity share of A Ltd. at a conversion price of ₹ 25 per share. Interest is payable half-yearly in cash. At the date of issue, A Ltd. could have issued non-convertible debt with a ten-year term bearing a coupon interest rate of 11%. On 1st January, 2X06, the convertible debenture has a fair value of ₹ 1,700. A Ltd. makes a tender offer to the holder of the debenture to repurchase the debenture for ₹ 1,700, which the holder accepts. On the date of repurchase, A Ltd. could have issued non-convertible debt with a five-year term bearing a coupon interest rate of 8%. Required How does A Ltd. account for the repurchase?
Suggested Answer and Working Notes:
In the financial statements of A Ltd., the carrying amount of the debenture is allocated on issue as follows: ₹ Liability component Present value of 20 half-yearly interest payments of ₹50, discounted at 11% (₹ 50 x 11.95) 598 Present value of ₹ 1,000 due in 10 years, discounted at 11%, compounded half-yearly (₹ 1,000 x 0.342) 342 940Equity componentDifference between ₹ 1,000 total proceeds and 940 allocated above 60Total proceeds 1,000The repurchase price is allocated as follows: Carrying Value (₹) Fair Value (₹) Difference (₹) Liability component: Present value of 10 remaining half-yearly interest Payments of ₹50, discounted at 11% and 8% respectively 377 406 Present value of ₹ 1,000 due in 5 years, discounted at 11% and 8%, compounded half yearly, respectively 585 676 962 1,082 (120) Equity component 60 618 (558) Total 1,022 1,700 (678) A Ltd. recognises the repurchase of the debenture as follows: (₹) Liability component Dr. 962 Debt settlement expense (P&L) Dr. 120 To Cash 1,082 (To recognize the repurchase of the liability component) Equity component Dr. 60 Reserves and Surplus Dr. 558 To Cash 618 (To recognize the cash paid for the equity component) The debt settlement expense represents the difference between the carrying value of the debt component and its fair value.
Topics: Ind AS 109
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