Grace Ltd was incorporated in Singapore and listed its shares in the Singapore Exchange since 1995. Grace
Question:
Grace Ltd was incorporated in Singapore and listed its shares in the Singapore Exchange since 1995. Grace Ltd, an international player in the paint and coating industry, and the primary competitors are Nippon Paint Holding and Imperial Chemical Industries (ICI) Limited. The company has constructed a new factory using innovative technology to manufacture the products. It will bring the company to the next level of expansion and stay abreast with the competitors. The entire manufacturing process will be computerised. To finance the construction of the factory, the company has initiated the following financing structure.
1. The company issued two categories of preference shares on 1 January 2021.
4% redeemable cumulative preference shares of $40,000,000. The preference shares will be redeemed at par value in 2040 at the option of the shareholders.
7% redeemable cumulative preference shares of $60,000,000. The preference shares will be redeemed at par value in 2045 at the option of the company.
2. On 1 January 2021, Grace Limited issued a $50,000,000 three years convertible bond at par value. The company did not incur any transaction issue costs for the bond. The bond’s coupon rate is ten per cent annually and payable in arrears on 31 December. The bond will be redeemed at par on 31 December 2023, and the holders of the bond may opt to convert to ordinary shares at the redemption date. Similar bonds without any conversion rights bear interest at 15% annually.
3. The company issued a debt instrument (loan stock) with a face value of $50,000,000 on 1 January 2021, and it will be redeemed on 31 December 2024 at par value. It has received cash proceeds of $44,000,000 net of discount given from the debt investors. Besides this, the company incurred a transaction cost of $487,000 to the issuance of the debt instrument in the market. Interest is payable annually in arrears on 31 December. The following is the annual interest payable.
| YEAR | INTEREST |
| 2021 | 5% |
| 2022 | 5% |
| 2023 | 12% |
| 2024 | 12% |
According to the company, the effective rate of interest is 12.4% per year.
Required:
a. Prepare an extract of the Income Statement and the Statement of Financial Position of Grace Limited to record the above financial liabilities for the years ended from 31 December 2021 to 2024 under IFRS 9 – Financial Instruments, assuming that the bond holders did not exercise their conversion option.
b. Evaluate the fundamental principle of classification of a financial instrument as liability or equity under IAS 32 – Financial Instruments – Presentation.
Expert Answer:
a Income Statement Extract and Statement of Financial Position under IFRS 9 Income Statement Extract in 000 Year Ended 2021 2022 2023 2024 Interest Ex... View the full answer
