Kish plc issued 6 million 7% convertible bonds on 1 January 2016 at par. The bonds are redeemable at par on 31 December 2019 or convertible at that date on the basis of two 1 ordinary shares for every nominal 10 of bonds. At the date of issue, the prevailing market rate for similar debt without conversion rights was 9%. The interest due was paid on 31 December 2016 and recorded within finance costs during the year.

i) Explain how convertible instruments are initially recognized, in accordance with IFRS 7 Financial Instruments: Disclosures, and prepare the journal entry to record the issue of the bonds by Kish plc. (10 marks)

ii) Explain how the bonds will be subsequently measured, in accordance with IAS 39 Financial Instruments: Recognition and Measurement, and prepare the journal entry to record the subsequent measurement of the bonds in the financial statements of Kish plc for the year to 31 December 2016. Prepare extracts that illustrate how the bonds will be presented in the statement of financial position of Kish plc as at 31 December 2016. (5 marks)

iii) The directors of Kish plc are reviewing their financing requirements. The directors are in agreement that they should structure their issue of financial instruments in order to be able to classify them as equity rather than debt. Any increase in gearing would be unacceptable. Therefore, they have provisionally decided to make issues of non redeemable preference shares to raise 5 million. These shares will carry a fixed interest rate of 6%, and because they are shares, they can be classified as equity. Explain to the directors of Kish plc, the accounting treatment of debt/equity classification, required by IFRS7 Financial Instruments: Disclosures, for the proposed issue, advising them on the acceptability of classifying the instruments as equity. (5 marks)