- 7 Marks
CR – May 2018 – L3 – Q2c – Financial instruments: Recognition and measurement Corporate reporting
Show the accounting treatment for a convertible loan note under IFRS 9 for income statement and financial position.
Question
Alfa Limited issued a GH¢5,000,000 18% convertible loan note at par on 1 July 2015 with interest payable annually in arrears. Three years later, on 30 June 2018, the loan note becomes convertible into equity shares on the basis of GH¢100 of loan note for 50 equity shares, or it may be redeemed at par in cash at the option of the loan note holder. The Financial Accountant of Alfa Limited has observed that the use of a convertible loan note was preferable to a non-convertible loan note as the latter would have required an interest rate of 24% in order to make it attractive to investors.
The present value of GH¢1 receivable at the end of the year, based on discount rates of 18% and 24%, can be taken as:
| Year | 18% | 24% |
|---|---|---|
| 1 | 0.847 | 0.806 |
| 2 | 0.718 | 0.650 |
| 3 | 0.609 | 0.524 |
Required:
Show the accounting treatments for the convertible loan note in Alfa Limited’s:
i) income statement for the years ended 30 June 2016, 2017, and 2018. (3 marks)
ii) statement of financial position as at 30 June 2016, 2017, and 2018. (4 marks)
(Note: Assume that the share option is taken at the end of June 30, 2018.)
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