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ABC Ltd is an Australian company issued $10 million convertible notes on 1 July 2019 that carry a nominal interest (coupon) rate of 5% per annum. They are redeemable on 30 June 2022 for cash or can be exchanged for ordinary shares in ABC Ltd on the basis of 20 shares for each $100 of note. The prevailing market interest rate for the notes without conversion options are 8%. When preparing the draft financial statements for the year ended 30 June 2020, the directors are proposing to show the convertible note within equity in the statement of financial position, as they believe all the convertible note holders will choose the equity option when the convertible note is due for redemption. They further intend to charge a finance cost of $500,000 ($10 million x 5%) in the income statement for each year up to the date of redemption
The following information relates to ABC Ltd, which has Australian dollars as its functional currency, in the year ended 30 June 2020:
1. It purchased a debt instrument issued by another company with the intention of holding it for a maximum of two years before selling it to another party. This intention reflects the objective of the business model within which the debt instrument is held.
2. It entered into a speculative forward contract to exchange $4 000 000 for €3 100 000.
Required:
Question 1: Explain how the definitions of financial instruments and classification requirements of AASB 9 are applied to these transactions.
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