It was the scene of yet another lengthy board meeting. The directors had just been informed that IAS 32 required the separate presentation on an issuer’s statement of financial position of liability and equity elements created by a single financial instrument. The company happened to have substantial amounts of convertible debt. A number of the directors were not happy with the requirements of IAS 32. The chief executive officer, Gladys Yong, who was particularly exasperated, said: “The accountants have done it again! They have devised these complicated rules to keep themselves busy. I have a strong feeling that the implementation will have costly consequences for us.”

(a) In what specific ways may the implementation be costly for firms? (Consider the financial statement effects of adopting IAS 32 as well as the costs of accounting for convertible debt under the new requirements.)

(b) In what ways may the implementation be beneficial for users of financial statements?

(c) Contrary to the stand taken by the Board, the FASB in the United States actually adopts the view that convertible debt need not be decomposed into separate components (unlike debt with detachable warrants). Why does the FASB stand a controversial issue?