Topic 3

Issuance, Redemption and

Conversion of Loan
Instruments
MFRS 7, MFRS 9, MFRS 132
(MFRS 17- Effective 1.1.2020)
 Content in this chapter:
3.1 Define types of liability instruments
3.2 Describe the measurement of the issuance of financial
instruments
3.3 Provide the explanation on the treatment for issuance
redeemable preference shares, debentures and convertible loan
stocks
3.4 Provide the discussion on the redemption methods of
redeemable preference shares and debentures

2
What is Financial Instrument?
Financial instrument is a contract that gives rise to a
financial asset of one entity and a financial liability or
equity instrument of an other entity.
contract

Company A Company B

3
 What is Financial Instrument?
contract

Company A Company B

Example:
1. An entity raises finance by issuing equity shares.
The entity that subscribes to the shares has a financial asset (an investment),
while the issuer of the shares who raised finance has to account for an equity
instrument (equity share capital.)

2. An entity raises finance by issuing bonds (debentures).

The entity that subscribes to the bonds i.e lends the money has a financial asset
(an investment), while the issuer of the bonds i.e the borrower who has raised the
finance has to account for the bonds as a financial liability.

4
 Financial
Instrument

Financial Equity Financial

Asset Instrument Liability

5
 3.1 Define types of liability
instruments:
a. Redeemable preference shares
b. Debentures
c. Convertible loan stocks

6
3.1 Define Types of Liability
Instruments
+ A company may issue loan instruments instead of
equity which may cheaper, easier to raise and not
permanent.
+ These loan may be medium or short-term
depending on their term to maturity
+ Only public companies can issue loan instruments
to the public
+ There are several type of liability instruments such as
debentures, bonds, convertible loan stock (compound
instruments) and redeemable preference shares.
+ Most of these borrowings have to be repaid, and there
will be some form of borrowing cost.
+ The cost of borrowing can be in the form of interest
and/or discount
+ Loan instruments may be listed on a
stock exchange, which means they can be
traded on stock exchange. Therefore, the
rights attached to them are transferable
and the owner of these instruments need
not hold them until maturity.
 (a) Redeemable preference shares
+ The issue and redemption of preference shares come within the
purview of the Companies Act 2016 subject to the company’s
constitution.
+ Though the name suggest they are ‘shares’ they are in fact
liabilities as they issued with a provision to be redeemed at a
future date, at a fixed or determinable amount.
+ The issuer (the company), has an obligation to settle the
liability. Dividends payable on redeemable preference shares
are considered expenses
 (b) Debentures
+ Debentures include debenture stocks, bonds, notes
and any other evidence of indebtedness of a
corporation for borrowed money.
+ Generally, debentures are issued with fixed interest
rates. Interests are expenses.
+ Debentures may be issued with other features such
as convertibility.
+ Convertible debentures are eligible to be converted
into ordinary shares either at the option of the
company or debenture holders.
+ During the issue of convertible debentures, the
terms of conversion such as conversion rate (i.e the
number of shares to be issued for a specific amount
of debentures), date of maturity or conversion date
and the party that has the option to choose will be
specified.
 (c) Convertible loan
+ Convertible loan are referred to as
hybrid instruments as they have
characteristics of both debt and equity.
+ The issue price is for both elements of
loan and equity
 Glossary
+ Financial instrument: A contract involving a
financial obligation
+ Debenture: is a long-term loan repayable at a fixed
date.
+ Bond: is usually a fixed-interest securities issued by
governments, local authorities or companies

14
 Glossary
+ Preference share: A share in a company that entitled to fixed
percentage dividend rather than a variable dividend
+ Convertible: A bond or stock that can be converted into the
securities usually securities
+ Redeemable shares: shares in company that the issuing
company has the right to redeem, under terms specified on
issue
+ Redemption: the repayment of shares, stocks, debenture or
bonds

15
3.2 Describe the measurement of the
issuance of financial instruments:
a) Amortized cost
b) Fair value through profit or loss (fair
value measurement)
3.2 Measurement of the issuance of financial
instruments
+ The financial liability may be issued at
a) Par
b) Discount
c) Premium
+ Interest paid will be the nominal amount stated
on issue
+ The effective interest rate is the rate that
exactly discounts the estimated cash
flows through the expected life of the
financial instrument
+ For example: If the instrument is issued
at par and redeemed at par, the nominal
and effective interest rate will be the
same
+ If the instrument is issued at a discount and
redeemed at par or premium, the nominal
interest rate will be less than the effective
interest rate
+ Sometimes, the company may issue
debenture at far below the nominal value
with zero interest rate and redeemable at par
+ There are 2 ways to measure the financial liability:
i. Amortised cost (Book Value)
ii. Fair value through profit or loss (FVTPL)
+ Amortised – The liability will be initially recognised at
fair value but subsequently it will be shown a carrying
amount which may not be fair value
+ Fair value – Liability raised can be recognised in the
financial statements at fair value initially and
subsequently, all charges to the fair value will be taken to
profit or loss
 Transaction cost
+ Such as consultancy and legal fees will be incurred
when loan instruments are issued.
+ The accounting treatment depends on how the
instrument is classified
+ The cost are either charged as expenses or deducted
from the liability, depending on how the liability is
measured
+ Liabilities that are carried at amortised
cost – transaction costs are deducted
from the liability or fair value minus
transaction cost
+ Liability measured at fair value-
transaction cost are written off as
expenses.
+ Accounting for a financial liability at amortised cost
means that the liability's effective rate of interest is
charged as a finance cost to the statement of profit or loss
(not the interest paid in cash) and changes in market rates
of interest are ignored – ie the liability is not revalued at
the reporting date.
+ In simple terms this means that each year the liability will
increase with the finance cost charged to the statement of
profit or loss and decrease by the cash repaid.
3.3 Provide the explanation on the treatment for issuance
redeemable preference shares, debentures and convertible
loan stocks
3.3.1 Construct the relevant accounting treatments
3.3.2 Prepare the extract of Statement of Financial
Position 

24
 3.2 Issuance Of Redeemable Preference
Share (RPS)
+ The procedure for the issuance of redeemable
preference shares are the same as for equity shares.
+ Company may issue redeemable preference shares
subject to its constitution.
+ Only preference share can be issued as redeemable
shares.
 3.2 Issuance Of Redeemable Preference
Share
Redemption at a premium
(RPS)
-When the preference share are redeemable at a premium, the
actual cost is a combination of the interest/dividend paid and the
building up of the premium till redemption date
-The effective interest rate will be higher than the nominal interest
rate
-The amount paid will be the contractual amount and the
difference between the amount paid and charges is credited to the
liability.
Example
1On
: January x1, Twins Bhd issued 5 million 5% redeemable
preference shares at RM1 each. Redeemable at a premium of 10% on
31/12/x4. Dividend is a payable on paid-up capital. The effective
interest rate is 7.3% and the interest date is 31 December.
The market price of shares in years x1 to x4 is shown below:

31/12/x1 RM1.05
31/12/x2 RM1.07
31/12/x3 RM1.08
31/12/x4 RM1.10
Discuss the accounting treatment where the
preference share are measured at:
a)Amortised cost
b)Fair value through profit and loss
 Solution :
+ The preference share will be recognised as a liability at RM5
million.
+ Dividends = 5%xRM5,000,000 =RM250,000
a) Measured at amortised cost
Provision for
Carrying amount + (provision
dividends- The Amount
for dividend-dividend paid)
Carrying Effective Interest of Dividend
1-Jan amount (7.3%) paid (5%) 31-Dec

X1 5,000,000 365,000 250,000 5,115,000

X2 5,115,000 373,395 250,000 5,238,395

X3 5,238,395 382,403 250,000 5,370,798

Redeemable at Premium
X4 5,370,798 379,202 250,000 5,500,000 10%
Solution:
As the market value of share is RM1.05,
b) Measured at fair value carrying amount will add up to
RM5,250,00 (RM1.05xRM5,000,000)

Carrying Fair Value

1-Jan amount Dividend (5%) Change 31-Dec

X1 5,000,000 250,000 250,000 5,250,000

X2 5,250,000 250,000 100,000  5,350,000

X3  5,350,000 250,000 50,000  5,400,000

X4 5,400,000  250,000 100,000  5,500,000

Dividend is recognised
as expenses
 Issuance Of Debentures
+ Debentures may be issued at par, at premium or
at discount
+ Debenture issued are initially recognized at fair
value which will normally be the issue price
+ After initial recognition, debentures should be
measured at amortised cost or fair value
Ways of issuing debenture

ISSUE AT ISSUE AT ISSUE AT

PAR PREMIU DISCOUN
When Issue M T
Price = When Issue When Issue
Face Value > Face Price <
Value Face Value
 Issuance Of Debentures
a) Measure at amortized cost
-Involves the amortizing differences between the initial
amount recognized and the final amount paid over the loan
term and increasing the liability by the amount amortized
-Debenture will be recognized at fair value and it will be
shown at amortized cost
-The market interest rate or effective interest rate will be
used to compute the interest expenses.
 Issuance Of Debentures
a) Measure at amortized cost
-The amount paid will be the nominal interest
-The difference between the effective and
nominal interest is added to the carrying
amount of the liability
 Issuance Of Debentures
b) Measure at Fair value
-At the end of each year the liability will be
disclosed at its fair value
-Interest paid will be the nominal amount
-Changes in the fair value will be taken to profit
and loss
 Example 2:
On January x3, Aye Bhd issued 5% debentures of nominal value
RM15,000,000 at a discount of 10%. The transaction cost incurred
amounted to RM350,000. The debentures will be redeemed at par
value. The effective interest rate is 8% and the interest date is 31
December. The market price of the debentures is shown below:
31/12/x3 RM14,000,000
31/12/x4 RM14,200,000
Required:
Discuss the accounting treatment according to:
a) Amortised cost
b) Fair value
Solution:
a) Amortised cost
 The transaction cost is deducted from liability
and not charged as an expenses
 Difference between interest expenses and
interest paid is added to carrying amount of the
liability
 Interest charged is calculated using market
interest on the carrying amount
Solution:
Liability (debenture) will be recorded as:
X3
Nominal Value RM 15,000,000
Less: Discount 10% RM 1,500,000
Less: Transaction cost RM 350,000
RM 13,150,000
Journal Entries (Amortised Cost)
Issuance of debenture
1 Jan RM
X3 Dr Bank (15,000,000-1,500,000) 13,500,000
RM
Cr 5% Debenture 13,500,000
(Proceeds from issue of debentures)

RM
Dr 5% Debentures 350,000
RM
Cr Bank 350,000
(Records the transaction cost)
 Journal Entries (Amortised Cost)
Interest paid
RM
31 Dec X3 Dr Interest expenses (RM13,150,000 x 8%) 1,052,000
Cr Bank (RM15,000,000 x 5%) RM 750,000
5% Debentures RM 302,000
(Record interest charged and paid)

Interest expenses RM
31 Dec X4 Dr [(RM13,150,000+RM302,000)x8% 1,076,160
Cr Bank (RM15,000,000 x 5%) RM 750,000
5% Debentures RM 326,160
(Record interest charged and paid)
Solution:
a) Fair Value
 The debenture is issue at a discount of 10% on the
nominal value
 The interest of 5% will be paid annually
 The transaction cost will be charged as an expenses
 Changes in the fair value will be taken to profit and
loss
Solution Fair Value:
Liability(Debenture) will be recorded as:
X3
Nominal Value RM 15,000,000
Less: Discount 10% RM 1,500,000

RM 13,500,000
 Journal Entries (Fair Cost)
Issuance of debenture
1 Jan X3 Dr Bank RM 13,500,000
Cr 5% Debenture RM 13,500,000
(Proceeds from issue of debentures)

Expenses-Issue cost/ transaction

Dr cost RM 350,000
Cr Bank RM 350,000
(Records the transaction cost)
 Journal Entries (Fair Cost)
Interest paid
31 Dec X3 Dr Interest expenses (RM15,000,000 x 5%) RM 750,000
Cr Bank RM 750,000
(Record interest paid)

Change in fair value

31 Dec X3 Dr Profit and Loss (RM14,000,000-RM13,500,000) RM 500,000
Cr 5% Debenture RM 500,000
(Record change in fair value)

Interest paid
31 Dec X4 Dr Interest expenses (RM15,000,000 x 5%) RM 750,000
Cr Bank RM 750,000
(Record interest paid)

Change in fair value

31 Dec X4 Dr Profit and Loss (RM14,200,000-RM14,000,000) RM 200,000
Cr 5% Debenture RM 200,000
(Record change in fair value)
 Issuance Of Convertible Loan Stock
-Convertible loan stock has features of both liability and
equity
-It is a compound or hybrid instrument
-This type of instrument gives the holder or issuer the option
to convert the debenture into shares.
-Accounting standards on financial instruments require this
instrument to be split into liability and equity components and
disclosed separately
 Issuance Of Convertible Loan Stock
-The transaction costs that relate to the
equity component are shown as a
deduction from equity and the portion
that relates to the liability component can
be charged as an expense in profit and
loss
Example:
Yee issued 4,000 6% convertible loan stocks on 1 Jan X2 with
face value of RM1,000 per loan stock. The loan period is 3
years. The total proceeds from the issue amounted
RM4,000,000. Interest payable at the end of each financial
year. Each loan stock is convertible at any time up to maturity
into 500 ordinary shares. When the loan stocks were issued,
the prevailing market interest rate for similar debt without the
conversion option was 9 percent.
Required:
Discuss the accounting treatment
Solution:
+ This instrument is part liability and part equity
+ The liability amount is calculated which is the
interest payable over 3 years and the principal
discounted using market interest rate (9%). The
balance will be recorded as equity
+ An interest rate of 6% will be paid on the
RM4,000,000 proceeds for 3 years
Solution:

+ The issuer continues to have an

obligation to make interest payments
until conversion or maturity
+ The liability amount is built up over the
term of the loan stocks to equal the
nominal value
Calculations:
6% Interest 9% Discount
Years   (6%x4,000,000) (Refer PVIF Table) Amount

1 Interest 240,000 0.9174 220,176

2 Interest 240,000 0.8417 202,008

3 Interest 240,000 0.7722 185,328

3 Loan 4,000,000 0.7722 3,088,800

Total Liability
Component 3,696,312

Proceeds 4,000,000

Equity Component 303,688

Solution:
+ The split between the liability and equity components
will be disclosed separately over the term of the
convertible debt as the company will not be able to
predict how much of the loan stocks will be converted
into shares
+ This is because not all holders of the stocks will
exercise their option to convert the loan stocks into
shares.
 9% Interest Paid on 6% Interest paid on Liability at
Years Borrowing carrying amount Nominal Amount Year-end

1 3,696,312 332,668 240,000 3,788,980

2 3,788,980 341,008 240,000 3,889,988

3 3,889,988 350,099 240,000 4,000,087

 Journal entries (if all convertible loan stocks are converted
into ordinary shares upon maturity)
RM RM
Year3

Dr 6% Convertible loan stocks 4,000,087

Equity component 303,688
Cr Ordinary Shares 4,303,775
3.4 Provide the discussion on the redemption methods of
redeemable preference shares and debentures
3.4.1 Describe three methods of redemption:
a. Profits
b. A fresh issue of shares
c. Capital of the company
3.4.2 Construct the relevant accounting treatments
3.4.3 Prepare the extract of Statement of Financial Position 
 Redemption of Loan Instruments
+ Redemption of preference shares and loan capital is not considered as
capital reduction
+ Share redemption will reduce the amount of outstanding preference shares
and entail cash outflows
+ Redemption of debentures will reduce non-current labilities, causing an
outflow of cash
+ To facilitate share redemption, company should either issue new shares to
provide the required funds or there must be sufficient distributable profits
to be transferred to the capital redemption reserve fund
 Redemption of Redeemable Preference Shares
Statutory requirements
Section 72 of the Companies Act 2016 lays down the following rules
regarding the redemption of preference shares:
a)Redemption is not considered as reducing amount of share capital of
the company
b)The shares can be redeemed only if they are fully paid
c)Redemption shall be out of one of the following:
i. A fresh issue of shares
ii. Profits
iii. Capital of the company

d)Redemption through a fresh issue of shares

A) Redemption By Issuing New Shares
+ In order to maintain the capital
structure of the company when the
redemption takes place, the directors
may issue new shares with a total
value equivalent to the share
redeemed
Redemption By Issuing New Shares
Journal Entries

RM XX
Dr Redeemable preference share capital
Cr Preference share redemption account RM XX
(Redeemable preference shares are being redeemed)
Issue new OSC
Dr Bank RM XX
Cr Ordinary Share capital RM XX
(Record issue of new shares for the redemption of shares)
Redeemed RPS
Dr Preference share redemption account RM XX
Cr Bank RM XX
(Record payment made to the preference shareholders)
Example 1:
ABC company redeemed all the company’s preference shares on 1
April 2010. It was further agreed upon that the redemption to be fully
financed by the new issue of 300,000 ordinary shares at RM 1 each.
Prepared the journal entries to record above transactions and the
SOFP immediate after the redemption.
ABC BHD
SOFP as at 31 December 2010
Solution:
A total of 300,000 new ordinary shares were issued raising RM300,000
to replace the 300,000 6% preference share capital redeemed.
Journal entries
Dr 6%Redeemable preference share capital RM 300K
Cr Preference share redemption account RM 300K
(Redeemable preference shares are being redeemed)

Dr Bank RM 300K
Cr Ordinary Share capital RM 300K
(Record issue of new shares for the redemption of shares)

Dr Preference share redemption account RM 300K

Cr Bank RM 300K
(Record payment made to the preference shareholders)
 ABC BHD
SOFP as at 31 December 2010
Assets (+300K-300K) 1,650,000

Issued Share capital

800,000 ordinary shares at RM1 800,000
Retained profit 850,000
1,650,000
b) Redemption Out Of Profits
Journal Entries

RM XX
Dr Redeemable preference share capital
Cr Preference share redemption account RM XX
(Being redemption of the preference shares)

Dr Retained Earnings RM XX
Cr Ordinary share capital RM XX
(Being transferred profits to contributed capital)

Dr Preference share redemption account RM XX

Cr Bank RM XX
(Being amount paid to the 6% redeemable preference shareholders)
Example 2:
ABC company redeemed all the company’s preference shares on 1
April 2010. All the redeemable preference shares were to be redeemed
out of profits. Prepared the journal entries to record above transactions
and the SOFP immediate after the redemption.

ABC BHD
SOFP as at 31 December 2010
Solution:
Since there is no issue of new shares made, an amount to the value of the 6%
redeemable preference share redeemed that is RM300K must be transferred
out of profit to contributed capital.
Journal Entries

RM 300K
Dr 6% Redeemable preference share capital
Cr Preference share redemption account RM 300K
(Being redemption of the preference shares)

Dr Retained Earnings RM 300K

Cr Ordinary Share capital RM 300K
(Being transferred profits to contributed capital)

Dr Preference share redemption account RM 300K

Cr Bank RM 300K
(Being amount paid to the 6% redeemable preference shareholders)
 ABC BHD
SOFP as at 31 December 2010
Assets (1,650,000-300,000) 1,350,000

Issued Share capital

500,000 ordinary shares, fully paid 800,000
Retained profit (850,000-300,000) 550,000
1,350,000
C) Redemption Partly New Shares And Partly Out of
Profits Example 3:
BMG issued 20 million 6% redeemable preference shares which
were redeemable at a premium of 10% on 31 December X1. The
company has amortised the premium payable over the issue
period.
The redeemable preference shares were redeemed and
8,800,000 ordinary shares were issued at RM1.25 each to
finance partly redemption of the preference shares.
Prepared the journal entries to record above transactions and the
SOFP immediate after the redemption.
 BMG BHD
Statement Of Financial Position
Other Assets 85,000,000
Bank 50,000,000
135,000,000

Share capital
40,000,000 ordinary shares 48,000,000
Retained Profits 50,000,000

Non-current liability
20,000,000 6% redeemable preference shares 22,000,000

Current liabilities 15,000,000

135,000,000
Solution:
The preference share capital is reduced but it is replaced only by the proceed of the issue of 8,800,000 new ordinary
shares of RM11 million. The proceeds from the fresh issue of shares are insufficient therefore, another RM11 million
must be provided by transferring out of profits to contributed capital.
Journal Entries
20,000,000 RPS redeemed =10% premium
20,000,000x10%=2,000,000 ->20,000,000+2,000,000= 22,000,000
20,000,000x110%=22,000,000 ->amount to be redeemed ‘000 ‘000
Dr 6% Redeemable preference share capital RM 22K
Cr Preference share redemption account RM 22K
(Being redemption of the preference shares)

Dr Bank RM 11K
Cr Ordinary Share capital (8,800,000xRM1.25) RM 11K
(Being ordinary share issued)

Dr Retained profits RM 11K

Cr Ordinary Share capital RM 11K
(Being transfer of profits to contributed capital)

Dr Preference share redemption account RM 22K

Cr Bank RM 22K
(Being amount paid to the 6% redeemable preference shareholders)
 BMG BHD
Statement of Financial Position
Other Assets 85,000,000
Bank (+11,000,000-22,000,000) 39,000,000
124,000,000

Share capital
48,800,000 ordinary shares 70,000,000*
Retained Profits (50,000,000-11,000,000) 39,000,000

Current liabilities 15,000,000

124,000,000

*48,000,000+11,000,000+11,000,000 = 70,000,000
D) Redemption Out of Capital
+ When a company redeems its preference shares by
capital it means that the shares redeemed need not
be replaced by the issue of shares or transfer of
profits to contributed capital.
+ One reason for the company to take such an action
could be that it is already overcapitalised.
Redemption Out of Capital
Given below is the statement of financial position of BLA as at 30 Junex14.
Non-current assets 200,000,000
Current assets (Except cash at bank) 150,000,000
Cash at bank 90,000,000
440,000,000
Issued Share capital
100,000 ordinary shares 350,000,000
Retained profits 50,000,000

Non-current liability
20,000,000 6% redeemable preference shares 25,000,000
Current liabilities 15,000,000
440,000,000

BLA issued 20 million 6% redeemable preference shares which were redeemable

at a premium of 25 percent on 30 June x14. The company had amortised the
premium payable over the issue period. All redeemable preference shares were to
be redeemed out of capital.
Solution:
Journal Entries ‘000 ‘000
Dr 6% Redeemable preference share capital RM 25K
Cr Preference share redemption account RM 25K
(Being redemption of the preference shares)

Dr Preference share redemption account RM 25K

Cr Bank RM 25K
(Being amount paid to the 6% redeemable preference shareholders)

Non-current assets 200,000,000

Current assets (Except cash at bank) 150,000,000
Cash at bank (90,000,000-25,000,000) 65,000,000
415,000,000
Issued Share capital
100,000 ordinary shares 350,000,000
Retained profits 50,000,000
Current liabilities 15,000,000
415,000,000
Redemption of Debentures
+ Debentures may be redeemed at the issue or
face value, below or above the issue value.
+ The financial reporting standards require the
discounts and premiums to be amortised
over the loan term if they were measured at
amortised
Redemption of Debentures
+ The carrying amount of the debt instrument will over
the years move towards the redemption value.
Therefore, on the redemption date the carrying amount
and redemption value will be the same.
+ On the redemption date the company will discharge
the liability
+ Where a liability instrument is redeemed, there is no
requirement to replace the liability
Example:
On January X1, Borrow Bhd issued RM20
million 10% debentures. These debentures
are redeemable in four years’ time at a
discount of 17.5 percent. The effective
interest rate is 6%.
Discuss the accounting treatment.
Answer:
+ The discount on redemption=
17.5% x RM20 million = RM3.5 million
+ Borrow Bhd will pay interest of RM2 million
on RM20 million each year
+ The actual cost to the company is the effective
interest rate of 6%
+ The discount of RM3.5 million is amortised
over the four years
 The amortisation schedule are as below:
At Start of year Interest Expense Liability + Interest paid Year-end
(6%) Interest Cost for (10% of RM20
year (A) million) (B) (A-B)

1.1.x RM20,000,000 6%xRM20,000,000 RM20,000,000+ RM2,000,000 RM19,200,000

1 = RM1,200,000 RM1,200,000=
RM21,200,000

1.1.x RM19,200,000 6%xRM19,200,000 RM20,352,000 RM2,000,000 RM18,352,000

2 =RM1,152,000

1.1.x RM18,352,000 6%xRM18,352,000 RM19,453,200 RM2,000,000 RM17,453,200

3 =RM1,101,120

1.1.x RM17,453,200 6%xRM17,453,200 RM18,500,392 RM2,000,000 RM16,500,392

4 =RM1,047,192
 Extracts from the Statements of Profit or Loss for
the Year Ended 31 December
X1 X2 X3 x4
Finance RM1,200,000 RM1,152,00 RM1,101,12 RM1,047,19
Cost 0 0 2

Statements of Financial Position as at 31 December

X1 X2 X3 x4
Non-
RM19,200,000 RM18,352,000 RM17,453,200 RM16,500,392
current
liability

The company will discharge the liability of RM16,500,392 on 31 December x4

Convertible Loan Stock
+ Convertible loan stocks and debentures are
referred to as compound instruments
+ A convertible loan capital is normally issued
with an option given to the holder or company to
convert the debt into an equity instrument
(usually ordinary shares) of the issuer during the
term of the debt until maturity
Example:
Tata Bhd issued 6% convertible debentures of
RM10 million on 1 January x3. Market interest rate
was 9% on 1 January x3. The debentures can be
converted into 400 ordinary shares (for every
RM1,000 debentures) or redeemed for cash on 1
January x6.

Discuss the accounting treatment.

Answer:
+ On 1 Jan x3, Tata Bhd has to recognise
the liability and equity elements in the
proceeds of RM10 million.
+ The liability is the annual interest of 6%
on RM10 million and the principal
amount payable at the end of three years
The components of liability and equity will be determined as below:
Year Discount Interest Expense (6%) Present Value
Factor 9%

6%xRM10,000,000= RM600,000X0.9174=RM550,440
X3 0.9174
RM600,000
X4 0.8417 RM600,000 RM505,020
X5 0.7722 RM600,000 RM463,320
RM10,000,000 RM10,000,000x0.7722=RM7,722,000
X5 0.7722
(Principal)
LIABILITY COMPONENT (A) RM9,240,780
EQUITY COMPONENT (B – A) RM759,220
TOTAL PROCEED (B) RM10,000,000
Journal Entries
1 Jan x3
Dr Bank RM10,000,000
Cr 6% Convertible Debentures RM9,240,780
Equity component RM759,220

31 Dec x3
Dr Statement of profit or loss (9%xRM9,240,780) RM831,670
Cr Bank (Interest paid) RM600,000
6% Convertible Debentures (RM831,670-RM600,000) RM231,670

31 Dec x4
Dr Statement of profit or loss (9%x(RM9,240,780+RM231,670)) RM852,521
Cr Bank (Interest paid) RM600,000
6% Convertible Debentures (RM852,521-RM600,000) RM252,521

31 Dec x5
Statement of profit or loss
Dr RM875,241
(9%x(RM9,240,780+RM231,600+252,521))
Cr Bank (Interest paid) RM600,000
6% Convertible Debentures (RM875,241-RM600,000) RM275,521
+ On the date of maturity (1 Jan X6), the convertible
debentures will either be converted into ordinary shares
or redeemed. Assuming the debentures are converted
to shares, then the journal entries will appear as follows:

Journal Entries
Dr 6% Convertible Debentures RM10,000,000
Cr Ordinary Share Capital RM10,000,000

Dr Equity Component RM759,220

Cr Ordinary Share Capital RM759,220
+ If the convertible debentures are redeemed
for cash, the journal entries will appear as
follows:
Journal Entries
Dr 6% Convertible Debentures *RM10,000,000
Cr Bank RM10,000,000

Dr Equity Component RM759,220

Cr Retained Earnings RM759,220

* Amount built up in the 6% convertible debentures account

(RM9,240,780+RM231,670+RM252,521+RM275,521) with rounding up
Thanks!
Any questions?

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