1. Sylvian Company uses IFRS. The company is considering the issuance of convert

Question

1.

Sylvian Company uses IFRS. The company is considering the issuance of convertible bonds. The bonds mature in 3 years, have a face value of $2,000,000 and pay interest annually at a rate of 6%. The net present value of the liability component is $1,896,912. Mr. Sylvian is curious as to the difference in accounting for these bonds if the company were to use US GAAP.

Instructions

(a) Prepare the entry to record issuance of the bonds at par under IFRS.

(b) Repeat the requirement for part (a), assuming application of US GAAP to the bond issuance.

(c) Which approach provides the better accounting? Explain.

Explanation / Answer

(a) Entry as per IFRS:

Bank Account Debit 1896912

To Bond Liability Credit 1896912

(Being liability initially recognised)

Interest expense Account Debit 2000000*6/100=1200000

To Bond Liability Account Credit 1200000

2)Entry as per GAAP

Bank Account debit 1896912

Unammortised discount on bonds debit 103088

To Bond liability credit 2000000

Interest account Debit 103088

To Unamortised discount on issue of bonds Credit 103088

(C)

1 Liability is recorded at Gross value under GAAP

Liability is recorded at Present value under IFRS

2 Discount is amortised as prepaid expense over the term of bond on SLM basis under GAAP

Discount is factored in while arriving at the effective interest rate of the instrument and amortised over the term under IFRS

Read more at: https://www.caclubindia.com/articles/accounting-deep-discount-bonds-i-gaap-ifrs-14002.asp

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