Describe the difference between the valuation of convertible bonds at issue using GAAP and IFRS
What will be an ideal response?
Answer: Convertible bonds without a beneficial conversion option using GAAP ignore the conversion feature. Convertible bonds with a beneficial conversion option separate the value of the bonds from the beneficial conversion feature. GAAP values the beneficial conversion feature as the excess of the market price of the stock at issue minus the implied exercise price of the stock in the beneficial conversion feature. The positive difference is credited to Paid-in Capital - Beneficial Conversion Feature and the bonds interest rate is recalculated and adjusted for difference.
Using IFRS, the value of the debt and conversion feature are bifurcated. The bonds are valued at the present value of the future cash flows of the bonds at the market rate of interest. The issue price minus the debt component is the value of the conversion feature and is credited to Other Capital Reserves.
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