Our team has put a lot of effort in studying relevant accounting standards. We understand the concerns of accountants and consultants. Our valuation can be prepared to fulfill different kinds of interpretation of relevant accounting standards.
Many finance and accounting professionals worry about the financial reporting of convertible bonds, convertible notes or convertible preference shares especially the issues in relation to valuation. First, valuing convertible instruments require solid knowledge in finance and valuation. In addition, if you are an issuer, the accounting treatment can be different as a result of different terms and conditions of the convertible bonds; whereas the treatment is simpler if you are holder. Fair value accounting under IFRS 9 and HKFRS 9 will apply and the convertible bonds will be stated on book at fair value.
Under HKAS 32 / IAS 32 Financial Instruments, when an issuer determines whether a financial instrument is a financial liability or an equity instrument, the instrument is an equity instrument if, and only if, both conditions (a) and (b) are met.
(a) The instrument includes no contractual obligation: (i) to deliver cash or another financial asset to another entity; or (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the issuer.
(b) If the instrument will or may be settled in the issuer’s own equity instruments, it is: (i) a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or (ii) a derivative that will be settled by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. For this purpose, the issuer’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the issuer’s own equity instruments.
Under IFRS 9 / HKFRS 9, there are standards to provide guidance on the measurement of the financial assets, liabilities and embedded derivatives. It is common to see different professionals or auditors to have different interpretations on the financial reporting standards especially when the terms of the convertible derivatives are highly sophisticated. With Valtech, you can rest assured that we provide breakdown of derivative components whenever possible so the valuation can serve different interpretation of the standards.
We have summarized some frequently asked issues in our professional practices. We hope these can help some market practitioners to have a better understanding on convertible instruments.