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Int. Acc. FA LECT 5&6: CH 16 part 2: Dilutive securities and EPS…
Int. Acc. FA LECT 5&6: CH 16 part 2: Dilutive securities and EPS
Repurchase at maturity
You do not have to pay them for giving up the conversion option. This is why we only debit bonds payable.
When you repurchase a bond at maturity: bondholders don’t have any intent to convert, so it has no value to the bondholder.
Conversion of bonds at maturity
Conversion of bonds before maturity
Repurchase before maturity
Roche determines the fair value of the liability component of the convertible bonds
(A)
at December 31, 2016, and then subtracts this amount from the fair value of the convertible bond issue (including the equity component)
(B)
to get the fair value for the equity
component (C)
. Then,
The amount relating to the equity component
(C)
is recognized (as a reduction) in equity.
The difference between the consideration allocated to the liability component
(A)
and the carrying amount of the liability
(D)
is recognized as a gain or loss
(E)
.
First, determine any adjustment to the equity
(B)-(A) = (C).
Next, determine the gain or loss on debt repurchase
(A)-(D) = (E)
.
Summary convertible bonds
When you
issue a convertible bond: Use With-and-without
method
Determine fair value of liability component (PV of principal and interest, discount by market interest rate)
Determine fair value of equity component (FV of bond minus FV of liability component)
Determine fair value of bond (equity + liability) = proceeds from issue
Repurchase at maturity
: bondholders don’t have any intent to convert, so it has no value to the bondholder. This is why we only debit bonds payable (debit bonds payable, credit cash)
Repurchase before maturity:
bond-holders have to give up the bond and a right to convert. This right has some value: we have to pay more for the repurchase. The difference between the fair value of the liability component at repurchase and the repurchase price is what we are giving back to bondholders for that option: this is debited to equity
Summary convertible bonds (II)
Repurchase before maturity:
Second, determine gain or loss on sale by comparing fair value of liability component to carrying value.
Finally, debit bonds payable and share premium (and loss on repurchase if applicable), credit cash (and gain on repurchase if applicable)
First, determine equity premium adjustment by subtracting FV of liability component from the repurchase price
Conversion at maturity:
At maturity, Bonds Payable amount (carrying value) should equal face value of debt due to discount amortization.
For conversion
: debit bonds payable and share premium – conversion equity, credit ordinary share capital (par value of shares) and share premium (bonds payable and conversion equity premium minus par value of shares).
Conversion before maturity:
Determine the carrying value of the liability component (bonds payable) using a schedule of bond amortization.
For conversion:
similar entry as before - debit bonds payable and share premium – conversion equity, credit ordinary share capital (par value of shares) and share premium (bonds payable and conversion equity premium minus par value of shares)