How do I bifurcate a convertible bond into debt and equity components under IFRS?

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AcadiFi · Accepted Answer

Under IAS 32, a convertible bond issued by the reporting entity is a compound instrument — it contains both a liability and an equity component. The accounting split works in three steps.

Step 1: Value the liability component first. Discount the straight-bond cash flows (coupons plus face value) at the yield a comparable non-convertible bond would carry. For example, Meridian Valley Corp issues a $220M convertible at par with a 3.5% coupon, 6-year maturity. A comparable plain-vanilla bond would yield 7.2%. PV of the liability = $155.4M.

Step 2: Plug the equity component. Equity component = Proceeds minus liability PV = $220M minus $155.4M = $64.6M. This is credited to a separate equity reserve and is never remeasured.

Step 3: Amortize the liability at the 7.2% effective rate. Interest expense each period exceeds the 3.5% cash coupon, so carrying value accretes toward face.

Under US GAAP (ASU 2020-06) most convertibles are now treated as a single liability without bifurcation, unless they contain a substantive conversion feature that requires separation as a derivative. That's why you may see divergence between IFRS and GAAP filers. Memorize the IFRS residual approach — equity is always the plug, not the measurement starting point.

How do I bifurcate a convertible bond into debt and equity components under IFRS?

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