PAS 32, paragraph 28, defines a compound financial instrument as "a financial

instrument that contains both a liability and an equity element from the perspective of
the issuer". In other words, one component of the financial instrument meets the
definition of a financial liability and another component of the financial instrument meets
the definition of an equity instrument. The common examples of compound financial
instrument are as follows:

a. Bonds payable issued with share warrants

b. Convertible bonds payable

Bonds issued with share warrants are considered as compound financial instrument.
Accordingly, the proceeds from the issuance of the bonds payable with share warrants
shall be accounted for as partly liability and partly equity.

The proceeds shall be allocated between the bonds payable and the share warrants.
PAS 32 does not differentiate whether the equity component is detachable or
nondetachable. Whether detachable or nondetachable, share warrants have a value
and therefore shall be accounted for separately.

PAS 32, paragraph 31, provides that equity instruments are instruments that evidence a
residual interest in the assets of an entity after deducting all of its liabilities. Therefore,
the bonds are assigned an amount equal to the "market value of the bonds exwarrant",
regardless of the market value of the warrants. The residual amount or remainder of the
issue price shall then be allocated to the share warrants.

If the bonds have no known market value ex-warrant, the amount allocated to the bonds
is equal to the present value of the bonds payable. The present value of bonds payable
is the sum of the present value of the principal bond liability and the present value of the
future interest payments using the effective or market interest rate for similar bonds
without the share warrants.
A financial liability is a contractual obligation

I. To deliver cash or other financial asset to another entity.

II. To exchange financial instruments with another entity under conditions that are
potentially unfavorable.

= Both I and II

How are the proceeds from issuing a compound financial instrument allocated between
the liability and equity components? = First, the liability component is measured at
fair value, and then the remainder of the proceeds is allocated to the equity
component.

When an entity issued convertible bonds, how will share premium be computed if the
bonds were converted into ordinary shares? = It is the difference between the
carrying amount of the bonds plus share premium from conversion privilege and
the total par or stated value of the shares issued.

When an entity issued bonds payable with detachable share warrants, how will share
premium be computed if the warrants are exercised by the bondholders? = It is the
difference between the proceeds received based on the exercise price plus the
share warrants outstanding and the total par or stated value of the shares issued.