Trojan Ltd issued some convertible bonds to Trevor Ltd. They have a life of five years and pay interest to Trevor Ltd each six months. The convertible bonds will be converted to shares only if Trevor makes the decision, at any time in the next five years, that it would prefer to receive shares in Trojan Ltd, rather than have its funds repaid.

Required

(a) How should Trojan Ltd disclose the convertible bonds in the balance sheet at the time of issue? There is a 40% chance that Trevor would convert the bond into equity. Explain whether this would influence disclosure of convertible bonds.

(b) Explain some of the economic implications for disclosure of convertible bonds in the books of Trojan Ltd.