Accounting for compound financial instruments under the Ind AS – Part I
A. Background: In recent times, many companies have chosen to raise money by issuing convertible instruments. A convertible instrument is a hybrid instrument that offers investors the option to redeem the security for cash at the end of (or during) its term or convert it to equity shares of the entity. Convertible instruments generally offer lower interest rates (because of the additional consideration by way of conversion option) than comparable conventional instruments, making them a cost-effective way for the entity to raise money. Convertible instruments are typically issued by companies that have high growth expectations and relatively lower credit ratings. The companies get access to money for expansion at a lower cost than they would have to pay for conventional instruments. Investors, in turn, get the flexibility of turning their convertible instruments into cash or equity shares of the entity. Examples of convertible instruments are optionally convertible preference shares