Deferred tax accounting for a debt instrument with a non-equity conversion option

Der Fall – die Lösung

1. Introduction

IAS 12.23 provides guidance on the recognition of deferred tax by the issuer of a compound financial instrument, such as a convertible bond with an equity component. It states that the exception in IAS 12.15(b) (the so-called ‘initial recognition exemption’) does not apply to the temporary difference resulting from separate recognition of the equity component. Accordingly, if the tax base of the liability component equals the total proceeds a deferred tax liability is recognised on the taxable temporary difference. The debit entry is to equity, while subsequent changes in the deferred tax liability are recognised in profit or loss.

However, some convertible bonds have no equity component. For example, if the number of shares issuable on conversion is variable or the bond is denominated in a foreign currency the conversion option is classified as a liability in accordance with IAS 32. The issuer of such a bond then recognises:

This article considers whether, and how, this affects the deferred tax accounting.

2. Issues

To determin...