COMPOUND

FINANCIAL
INSTRUMENTS
 COMPOUND FINANCIAL INSTRUMENTS

DEBT SECURITIES Share warrants

Convertibility Option

9/3/20XX Presentation Title 2

Accounting for Compound Financial Instruments
• Liability Component
• Equity Component

• PAS 32

9/3/20XX Presentation Title 3

 Split Accounting
STEP 1: ALLOCATE AT AN
AMOUNT TO THE FV OF
LIABILITY COMPONENT
STEP 2: ANY EXCESS OF

How to ISSUANCE PROCEEDS

SHALL BE ALLOCATED TO

allocate?
EQUITY COMPONENT

CASH xxx
DBP xxx
Bonds Payable xxx
PBP
xxx
Share Premium-share warrants
or Convertibility option xxx

9/3/20XX 4
 Split Accounting
STEP 1: ALLOCATE AT AN
AMOUNT TO THE FV OF
GARCIA Company issued bonds LIABILITY COMPONENT
payable with total face amount
of P5,000,000 for 110. The STEP 2: ANY EXCESS OF
bonds came with share warrants ISSUANCE PROCEEDS
to acquire a total of 50,000 SHALL BE ALLOCATED TO
ordinary shares of the company EQUITY COMPONENT
at P20/share. Comparable
vanilla bonds without share
CASH xxx
warrants have fair value of 105
DBP xxx
while the warrants have a total
Bonds Payable xxx
P350,000 fair value
PBP
xxx
Share Premium-share warrants
or Convertibility option xxx

9/3/20XX 5
Allocation of Bond issue cost
• Registration fees
• Bond certificate printing costs
• Underwriting fees
• Accounting, legal and other professional fees
Ramos Company issued a four-year, 10%
interest-bearing bonds payable with
PROPORTIONAL BASIS aggregate face amount of P3,000,000. These
bonds were issued at a total price of 99.
Included in the issuance of the bonds is the
option to convert them into 100,000 of the
Based on initial issue price company’s ordinary shares. Similar bonds
convertibility option have market rates
averaging 12%. In addition, Bond issue cost
Note: BIC will reduce the amount both liability incurred is P90,079
and equity 6
 Actual exercise of share warrants or
convertibility option
CASH xxx
DBP xxx
Bonds Payable xxx
PBP
xxx
Share Premium-share warrants xxx

9/3/20XX Presentation Title 7

 SHARE WARRANTS

CASH xxx
DBP xxx CASH xxx
Bonds Payable xxx Share Premium-share warrants xxx
PBP Share Capital xxx
xxx Share Premium-squeeze xxx
Share Premium-share warrants xxx
On Jan 1, 2023. Reyes Company
issued a 5-year, 9% interest-bearing
bonds payable with face amount of
P4M. Together with the bonds, the
company also issued 40,000 share Exercise Price
warrants. Each warrant can be
exercise in order to acquire one of the Par Value
Company’s P20 par value ordinary
shares at P50 per share. Total issue
price amounted to P4,300,000 while Scenario 1: All warrants were exercise
the FV of bonds without the warrants Scenario 2: Only 30,000 were exercised
amounted to P3,900,000
8
 Convertible Bonds
CASH xxx
DBP xxx
Bonds Payable xxx Bonds Payable, net xxx
PBP Share Premium- convertibility xxx
xxx PBP xxx
Share Premium- convertibilty xxx DBP xxx
On Jan 1, 2023. Mendioza Company Share Capital xxx
issued 5,000 convertible bonds with Share Premium-squeeze xxx
P1,000 face amount per bond and
term of five years. These bonds bear
interest 9% that is payable every
December 31 of each year and each
of is convertible to 10, P80 par value Par Value
ordinary shares of the company. Issue
price is P5,050,000 while the market Scenario 1: All bonds were converted on December
rates for similar bonds without the 31, 2024
conversion option averaged 11% Scenario 2: Only 4,000 bonds were convert on
December 31, 2025
9
 Retirement of the bonds
Bonds Payable, net xxx
CASH xxx
Share Premium- convertibility xxx
DBP xxx
PBP xxx
Bonds Payable xxx
DBP xxx
PBP
Share Capital xxx
xxx
Share Premium-squeeze xxx
Share Premium-share warrants xxx
On January 1, 2023 SANTOS Company issued 4-year, 8%
interest-bearing bonds with aggregate par value of P4M at a
total price of P4,150,000. The bonds are convertible to
100,000 ordinary shares with P30 par value. Without the
conversion option, the bonds can be issued at a 10% market
yield.

On December 31, 2024, the company decided to retire the

bonds by paying the bondholders a total amount of
P4,050,000. Same date similar bonds conversion option
have a 9% market yield
10
EXTINGUISHMENT
OF LIABILITIES

EXTIGUISHMENT OF
LIABILITIES
Extinguishment of liabilities
A. Payment of Cash
B. Payment of Non-Cash
C. Issuing of Entity’s own equity instruments
D. Substantial Modification of the terms

9/3/20XX Presentation Title 12

Extinguishment of liabilities
A. Payment of Cash

9/3/20XX Presentation Title 13

Extinguishment of liabilities
A. Payment of Cash
Cash paid < CA of Liability (there is a gain)
Cash paid > CA of liability (there is a loss)

GONZALES Company had a financial liability that has a

carrying amount of P4,500,000 as of December 31,
2023. On the same date, the company paid cash to the
creditors to extinguish the said liability
1. Amount paid was P4,850,000
2. Amount paid was P4,420,000

9/3/20XX Presentation Title 14

Extinguishment of liabilities
A. Payment of Cash
B. Payment of Non-Cash
C. Issuing of Entity’s own equity instruments
D. Substantial Modification of the terms

9/3/20XX Presentation Title 15

Extinguishment of liabilities
A. Payment of Cash
FV OF NCA IS IGNORED
B. Payment of Non-Cash
C. Issuing of Entity’s own equity instruments
D. Substantial Modification of the terms
CA of Non-cash Asset< CA of Liability (there is a gain)
CA of Non-cash Asset > CA of liability (there is a loss)
GONZALES Company was short on cash when one of its load payable with
carrying amount of P6,000,000 matured. The company entered into an
agreement with the creditor to accept non-cash asset as payment
1. A building with original cost P15,000,000 and accumulated depreciation of
P9,500,000 is to be transferred to the creditor. The Building has FV of
P4,800,000
2. A vacant lot classified as investment property with carrying amount
P6,450,000. The land FV is P7,250,000 16
Extinguishment of liabilities
A. Payment of Cash
B. Payment of Non-Cash
C. Issuing of Entity’s own equity instruments
D. Substantial Modification of the terms

9/3/20XX Presentation Title 17

Extinguishment of liabilities Hierarchy
1. FV of issued equity instruments
2. FV of Extinguished liability
A. Payment of Cash 3. CA of extinguished liability

B. Payment of Non-Cash Debt to Equity Swap

C. Issuing of Entity’s own equity instruments
D. Substantial Modification of the terms
GONZALES Company had maturing financial liability with carrying amount of P3,500,000.
However, the company did not have any cash nor noncash asset to pay the creditor with the
company issuing 200,000 of its P15 par value ordinary shares as payment for the maturing
financial liability .
1. The shares had fair value of P20/share while the financial liability had fair value of P3,815,000
2. The shares had fair value of P20/share while the financial liability fair value is not reliably
determinable
3. The FV share is not reliably determinable while the financial liability had FV of P3,365,000
4. The FV of both shares and the Financial liability are not reliably determinable
Accounting for Partial extinguishment of Financial
Liability
Proportion of the updated CA corresponding to the partially
extinguished portion.
GONZALES Company had outstanding bonds payable of P10,000,000 and balance of
P600,000 in its discount of bonds payable account
1. Half of the bonds were redeemed from the bondholders by paying P5,120,000
2. 60% of the bonds were redeemed by transferring a land with carrying amount of
P5,500,000 and FV of P5,850,000
3. 40% of the bonds were paid by issuing 100,000 shares of the company with
P35/share fair value and P20 par value. The bonds have a total fair value of
P9,800,000

9/3/20XX Presentation Title 19

 Accounting for the extinguishment of Financial
liability not on interest payment date
GONZALES Company reported the following amortization table of one of its bonds
payable with face amount of P4,000,000, stated rate of 10% and effective interest rate of
8% DATE INTEREST INTEREST AMORTIZATION CA PBP
PAID EXPENSE
Dec 31, 2023 4,264,970 264,970
Dec 31, 2024 400,000 341,198 (58,802) 4,206,168 206,168
Dec 31, 2025 400,000 336,493 (63,507) 4,142,661 142,661

Dec31, 2026 400,000 331,413 (68,587) 4,074,074 74,074

Dec 31, 2027 400,000 325,926 (74,074) 4,000,000

1. On July 1, 2026, the bonds were retired by paying the bondholders P4,150,000 plus accrued
interest
2. On October 1, 2025, the bonds were retired by paying the bondholders P4,250,000 including
20
accrued interest
Modification of terms PFRS 9:
• Interest rate Note: OLD effective rate
is used in computing the
• Maturity value new liability
• Or both EXTINGUISH THE OLD AND
RECOGNIZE THE NEW
INTEREST CONCESSION- reduction of interest rate,
forgiveness of unpaid interest or a moratorium on interest
MATURITY VALUE CONCESSION- Extension of the maturity
date or reduction of the principal amount
SUBSTANTIAL MODIFICATION
CRUZ Company is currently experiencing
financial difficulties and is concerned that it
could miss the scheduled payments of the
principal and interest of one of its loan
payables with carrying amount of The gain/loss on
P8,000,000. As a result, it entered into an extinguishment is at least 10%
OLD-NEW
agreement with the creditor to modify the
OLD of Old liability
terms of the loan payable 21
On January 1, 2019, an entity showed the following:
Notes payable-due Jan 1, 2019-14% P5,000,000
Accrued Interest payable 1,000,000
The entity is granted by the creditor the following concessions on Jan1,
2019
Note: OLD effective rate
a. The accrued interest of P1,000,000 is forgiven
is used in computing the
b. The principal obligation is reduced to P4,000,000 new liability
c. The new interest rate is 10% payable every Dec 31
d. The new date of maturity is Dec 31, 2022

9/3/20XX Presentation Title 22

On January 1, 2019, an entity showed the following:
Notes payable-due Jan 1, 2019-10% P5,000,000
Accrued Interest payable 1,000,000
The entity is granted by the creditor the following concessions on Jan1,
2019
Note: OLD effective rate
a. The accrued interest of P1,000,000 is forgiven
is used in computing the
b. The new interest rate is 14% payable every Dec 31 new liability
c. The new date of maturity is Dec 31, 2021

9/3/20XX Presentation Title 23

Do advance reading
• Shareholders Equity
• Retained Earnings

9/3/20XX Presentation Title 24