[oneFREAKINGpoint]

I’m going through MCQ’s and came across this one:

Which of the following statements characterizes convertible debt under IFRS?

A. Clearly wrong

B. Clearly wrong

C. The conversion feature can be traded separately

D. An equity component should be recognized upon issuance equal to the difference between the proceeds received and the fair value of the bond liability

The answer is D (and this I understand–it’s the freaking definition).

Option C is wrong (according to the explanation) because “the conversion feature cannot be traded separately”. This explanation is what confused me because…

I read in the book (using Becker) that when it comes to IFRS, “both a liability and an equity component should be recognized…this is similar to the accounting for bonds with detachable warrants (reference to detachable warrants).” If I’m not mistaken, detachable warrants are accounted for AND TRADED separately. PLUS the Becker study notes say “Under IFRS, the bond (liability) and conversion feature (equity) ARE RECOGNIZED SEPARATELY when convertible bonds are issued…”

So is my confusion simply because recognized <does not equal> traded? (Can convertible bonds under IFRS be booked separately (like detachable warrants), just not traded separately (unlike detachable warrants)? Is that the trick?)

Edited for spelling…>_<

[Anonymous]

I'm going to assume yes. Just because convertible bonds are recorded as both a component of debt and a component of equity it doesn't necessarily mean that the conversion feature can be traded separately. There was nothing regarding the trading of a conversion feature in my Becker Final Review or Roger CRAM. So, I'm assuming that can't be done.

[oneFREAKINGpoint]

It's crazy how many little details there are. 🙁

[Author]

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