IAS 32 – NBC Institute

CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

Question

The following transactions relate to Alilerimba Limited:

Convertible Bonds
- On July 1, 2011, Alilerimba Limited issued 400,000 convertible bonds with a 3-year tenure and a total fair value of N4 million, which is also the par value.
- The bonds carried an interest rate of 16% per annum, payable annually in arrears, while similar bonds without the conversion option carried an interest rate of 19% per annum on the same date.
- The company incurred 10% issue costs. If the investors did not convert to shares, the bonds would have been redeemed at par.
- At maturity (June 30, 2014), all bonds were converted into 1 million ordinary shares with a nominal value of N4 per share. No conversions were allowed before maturity.
- The directors are uncertain how to account for the bonds up to the date of conversion. They were informed that the effective interest rate, considering issue costs, was 24%.
Revenue Recognition for Handsets
- Alilerimba purchases handsets at N120,000 each and sells them to customers at N90,000, provided the customers also purchase prepaid credit cards.
- Prepaid credit cards are sold for N12,600 each and expire after six months. The average unused credit per card at expiry is N1,800.
- Selling costs for the handsets are estimated at N600 per unit.
- Alilerimba also sells handsets to dealers for N50,000 each, invoicing them for this amount. Dealers are allowed to return the handsets until a service contract is signed by a customer. When a service contract is signed, the handset is given to the customer free of charge.
- Dealers receive a commission of N168,000 per customer connection. Net of the handset cost (N90,000), Alilerimba pays N78,000 to dealers for each customer connection.
- Handsets cannot be sold separately by dealers, and the service contract has a 12-month duration. Dealers do not sell prepaid phones, and Alilerimba earns monthly revenue from the service contracts.
- The Chief Operating Officer, a non-accountant, has requested an explanation of the accounting principles and practices to apply for handset purchases and revenue recognition.
Preference Shares
- Alilerimba Limited issued 8% preference shares with a redemption feature that entitles holders to receive cash.

Required:

Advise the directors of Alilerimba Limited on:
(a) The accounting treatment for the convertible bonds. (12 Marks)
(b) The accounting principles and practices to apply for the purchase of handsets and recognition of revenue from customers and dealers. (6 Marks)
(c) The provisions of IAS 32 regarding the presentation in financial statements of financial instruments entitling holders to receive cash with a redemption feature. (2 Marks)

(Total: 20 Marks)

Answer

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Tags: Convertible Bonds, Financial instruments, IAS 18, IAS 32, Preference shares, Revenue Recognition
Level: Level 3

CR – May 2017 – L3 – Q6b – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Distinguish between liability and equity under IAS 32 with examples.

Question

It is important for entities to understand and properly classify their financial instruments. This is because some financial instruments may have features of both debt and equity, which can lead to inconsistency in reporting. To this end, financial reporting standards provide guidance on the difference between financial instruments classified as equity and liabilities.

Required:
With relevant examples, distinguish between liability and equity under IAS 32: Financial Instruments Presentation. (7 Marks)

Answer

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Tags: Classification, Equity, Financial instruments, IAS 32, Liability
Level: Level 3

FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)

Discuss how to treat transactions of debt and equity instruments in Akwa Nig. Limited under IAS 32.

Question

Akwa Nig. Limited is a private limited company planning to be registered with the Nigeria Exchange Limited (NGX). The company is engaged in the conversion of petrol engines into compressed gas engines.

The following are the transactions of the company in respect of its debts and equity instruments.

Transaction 1:
Akwa Nig. Limited issued 40 million non-redeemable N1 preference shares at par value. Under the terms relating to the preference shares, a dividend is payable on the preference shares only if Akwa Nig. Limited also pays a dividend on its ordinary shares for the same period. (5 Marks)

Transaction 2:
Akwa Nig. Limited entered into a contract with a supplier to buy a significant item of equipment. Under the terms of the agreement, the supplier will receive ordinary shares with an equivalent value of N5 million one year after the equipment is delivered. (5 Marks)

Transaction 3:
The directors of Akwa Nig. Limited, on becoming directors, are required to invest a fixed agreed sum of money in a special class of N1 ordinary shares that only directors hold. Dividend payments on the shares are discretionary and are ratified at the Annual General Meeting (AGM) of the company. When a director’s service contract expires, Akwa Nig. Limited is required to repurchase the shares at their nominal value. (5 Marks)

A senior accountant in your company (Akwa Nig. Limited) has asked for your advice on how the above transactions should be treated in the financial statements of your company in accordance with IAS 32 – Financial Instruments: Presentation.

Required:
Write a memo on the above request, discussing and justifying how each of the transactions should be treated in the financial statements, in accordance with IAS 32 – Financial Instruments: Presentation.

Answer

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Tags: Debt, Equity, Financial instruments, Financial Statements, IAS 32, Preference shares
Level: Level 2

Topic: Financial Instruments (IAS 32, IFRS 9)
Series: MAY 2024

CR – Mar 2023 – L3 – Q2b – IAS 12: Income taxes

Discuss the appropriate accounting treatments for Sanda Ltd’s preference shares and deferred tax asset.

Question

Sanda Ltd, a consumer electronics company in Accra, faced a challenging year due to increased competition and COVID-19. Sanda Ltd has a year-end of 31 December 2021. The unaudited financial statements reported an operating loss, and debt covenant limits were close to being breached. The following occurred during the year:

i. On 1 January 2021, the Finance Director and CEO paid GH¢3 million each for preference shares that provide cumulative dividends of 7% per annum. These preference shares can either be converted into a fixed number of ordinary shares in three years or redeemed at par. The Finance Director suggested classifying the preference shares as equity.

ii. Sanda Ltd included a deferred tax asset in the statement of financial position based on losses incurred in the previous two years. The Finance Director asked the Accountant to include the deferred tax asset in full, expecting a return to profitability once funding issues are resolved.

Required:
With reference to International Financial Reporting Standards (IFRS), discuss the appropriate accounting treatments which Sanda Ltd should adopt for the issues identified in i) and ii) and their impact on gearing as at 31 December 2021.

Answer

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Tags: Convertible Instruments, Deferred Tax, Equity, IAS 12, IAS 32
Level: Level 3

Topic: IAS 12: Income taxes
Series: MAR 2023

CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

Question

The following transactions relate to Alilerimba Limited:

Convertible Bonds
- On July 1, 2011, Alilerimba Limited issued 400,000 convertible bonds with a 3-year tenure and a total fair value of N4 million, which is also the par value.
- The bonds carried an interest rate of 16% per annum, payable annually in arrears, while similar bonds without the conversion option carried an interest rate of 19% per annum on the same date.
- The company incurred 10% issue costs. If the investors did not convert to shares, the bonds would have been redeemed at par.
- At maturity (June 30, 2014), all bonds were converted into 1 million ordinary shares with a nominal value of N4 per share. No conversions were allowed before maturity.
- The directors are uncertain how to account for the bonds up to the date of conversion. They were informed that the effective interest rate, considering issue costs, was 24%.
Revenue Recognition for Handsets
- Alilerimba purchases handsets at N120,000 each and sells them to customers at N90,000, provided the customers also purchase prepaid credit cards.
- Prepaid credit cards are sold for N12,600 each and expire after six months. The average unused credit per card at expiry is N1,800.
- Selling costs for the handsets are estimated at N600 per unit.
- Alilerimba also sells handsets to dealers for N50,000 each, invoicing them for this amount. Dealers are allowed to return the handsets until a service contract is signed by a customer. When a service contract is signed, the handset is given to the customer free of charge.
- Dealers receive a commission of N168,000 per customer connection. Net of the handset cost (N90,000), Alilerimba pays N78,000 to dealers for each customer connection.
- Handsets cannot be sold separately by dealers, and the service contract has a 12-month duration. Dealers do not sell prepaid phones, and Alilerimba earns monthly revenue from the service contracts.
- The Chief Operating Officer, a non-accountant, has requested an explanation of the accounting principles and practices to apply for handset purchases and revenue recognition.
Preference Shares
- Alilerimba Limited issued 8% preference shares with a redemption feature that entitles holders to receive cash.

Required:

(Total: 20 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Convertible Bonds, Financial instruments, IAS 18, IAS 32, Preference shares, Revenue Recognition
Level: Level 3

CR – May 2017 – L3 – Q6b – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Distinguish between liability and equity under IAS 32 with examples.

Question

Required:
With relevant examples, distinguish between liability and equity under IAS 32: Financial Instruments Presentation. (7 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Classification, Equity, Financial instruments, IAS 32, Liability
Level: Level 3

FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)

Discuss how to treat transactions of debt and equity instruments in Akwa Nig. Limited under IAS 32.

Question

The following are the transactions of the company in respect of its debts and equity instruments.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Debt, Equity, Financial instruments, Financial Statements, IAS 32, Preference shares
Level: Level 2

Topic: Financial Instruments (IAS 32, IFRS 9)
Series: MAY 2024

CR – Mar 2023 – L3 – Q2b – IAS 12: Income taxes

Discuss the appropriate accounting treatments for Sanda Ltd’s preference shares and deferred tax asset.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Convertible Instruments, Deferred Tax, Equity, IAS 12, IAS 32
Level: Level 3

Topic: IAS 12: Income taxes
Series: MAR 2023

Question Tag: IAS 32

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CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

Required:

CR – May 2017 – L3 – Q6b – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Distinguish between liability and equity under IAS 32 with examples.

FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)

Discuss how to treat transactions of debt and equity instruments in Akwa Nig. Limited under IAS 32.

CR – Mar 2023 – L3 – Q2b – IAS 12: Income taxes

Discuss the appropriate accounting treatments for Sanda Ltd’s preference shares and deferred tax asset.

CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

Required:

CR – May 2017 – L3 – Q6b – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Distinguish between liability and equity under IAS 32 with examples.

FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)

Discuss how to treat transactions of debt and equity instruments in Akwa Nig. Limited under IAS 32.

CR – Mar 2023 – L3 – Q2b – IAS 12: Income taxes

Discuss the appropriate accounting treatments for Sanda Ltd’s preference shares and deferred tax asset.

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Question Tag: IAS 32

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CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

Required:

You're reporting an error for "CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)"

CR – May 2017 – L3 – Q6b – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Distinguish between liability and equity under IAS 32 with examples.

You're reporting an error for "CR – May 2017 – L3 – Q6b – Financial Instruments (IFRS 9, IAS 32, IAS 39)"

FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)

Discuss how to treat transactions of debt and equity instruments in Akwa Nig. Limited under IAS 32.

You're reporting an error for "FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)"

CR – Mar 2023 – L3 – Q2b – IAS 12: Income taxes

Discuss the appropriate accounting treatments for Sanda Ltd’s preference shares and deferred tax asset.

You're reporting an error for "CR – Mar 2023 – L3 – Q2b – IAS 12: Income taxes"

CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

Required:

You're reporting an error for "CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)"

CR – May 2017 – L3 – Q6b – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Distinguish between liability and equity under IAS 32 with examples.

You're reporting an error for "CR – May 2017 – L3 – Q6b – Financial Instruments (IFRS 9, IAS 32, IAS 39)"

FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)

Discuss how to treat transactions of debt and equity instruments in Akwa Nig. Limited under IAS 32.

You're reporting an error for "FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)"

CR – Mar 2023 – L3 – Q2b – IAS 12: Income taxes

Discuss the appropriate accounting treatments for Sanda Ltd’s preference shares and deferred tax asset.

You're reporting an error for "CR – Mar 2023 – L3 – Q2b – IAS 12: Income taxes"

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