How to Account for Convertible Debt (IFRS)

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The accounting for convertible debt under International Financial Reporting Standards (IFRS) differs significantly from the accounting per U.S. GAAP. Per IFRS, convertible debt is bifurcated (split) into 2 components: a debt component and an equity component (the conversion feature is treated as an option and thus equity).

First, you need to calculate the fair value of the liability component as of the issuance date. You do this by computing the present value of the bond’s face value (the amount the borrower promised to repay) plus the present value of the bond’s interest payments. You then subtract the sum of these two numbers from the fair value of the convertible debt as a whole (this is simply the amount the borrower received for the convertible debt) and the residual amount is the value of the equity component. Here’s the equation again:

fair value of convertible debt – fair value of liability component = equity component

You then record a bond discount and set up an effective interest table to amortize the bond discount over time.
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