How to account for a convertible loan to a company in a net deficit position under IFRS?

How to account for a convertible loan to a...

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Redeemable, convertible preference shares have been issued to a company which has a net deficit. (In addition, for tax purposes, a BIg 4 firm valued the ordinary share capital of the company at the date of the company as £nil.)

Ordinarily, I would split the preference shares into debt and equity by estimating the net present value of the debt without the conversion option and deducting it from the proceeds, to determine the value of the option/equity. 

Does the fact that the company was bust when the preference shares were issued have any bearing? For example, does it make any sense to say the loan is worth anything when it has been issued to a "worthless" company? Could one argue that all the value is in equity i.e. the optionality to convert into ordinary share capital if the company becomes profitable? 

The company is preparing financial statements under IFRS. 

Any thoughts most welcome!

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By johngroganjga
11th Feb 2015 16:49

Are you sure you mean Issued "to", as you say twice? The rest of what you say seems to suggest they were issued "by" the company in question.

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By draze1458
11th Feb 2015 16:54

Yes - I should meant to say "by"

(I think I said "to" as I'm thinking of it as a loan being extended to the company)

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