Mandatorily convertible bond classified as equity
An entity, with a functional currency of Euro, issues 2,000 convertible bonds with a nominal value of €1,000 per bond, giving total proceeds of €2,000,000. The bonds have a three-year term, and interest is payable, at the discretion of the entity, annually in arrears at a nominal annual interest rate of 6% (i.e. €120,000 per annum). At maturity of the bond each bond converts into 250 ordinary shares. Because the conversion option meets the definition of an equity instrument and payment of interest is at the discretion of the entity, the entire instrument is classified as an equity instrument. The entity records the following accounting entry.