Convertible bond deductible if settled
An entity issues a convertible bond for €1 million. After three years, the holders can elect to receive €1.2 million or 100,000 shares of the entity. If the bond were settled in cash, the entity would receive a tax deduction for the €200,000 difference between its original issue proceeds and the amount payable on redemption. If the bond is converted, no tax deduction is available.
Under IAS 32, the bond would be accreted from €1 million to €1.2 million over the three year issue period. The tax base remains at €1 million throughout, so that a deductible temporary difference of €200,000 emerges over the issue period. It is assumed that the deferred tax asset relating to this difference would meet the recognition criteria in IAS 12.
For various reasons, it is extremely unlikely that the bond will be redeemed in cash.
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