ACCA SBR 2026: Not Every Convertible Is Compound — The IAS 32 Mistake Costing 11 Marks

Convertible does not mean compound. In September/December 2025 the SBR examiner asked candidates to explain why the convertible loan notes were a liability and the convertible preference shares were a compound instrument — and a large number concluded the exact opposite.

What the examiner found

Question 4 (Carroll Co) put 11 marks on IAS 32 alone. The examining team reported that weaker candidates showed "only a superficial grasp of IAS 32" and could not separate the debt component from the equity component. The requirement effectively gave them the classification — and they still argued the reverse.

Calculation quality was worse. The single most common numerical error was discounting the future cash flows at the coupon rate instead of the market rate for a comparable instrument without the conversion option. Others bypassed discounting altogether. A substantial minority attempted no calculations at all.

The test that decides it

An equity component only exists if the instrument will be settled by delivering a fixed number of the entity's own shares for a fixed amount. That is the fixed-for-fixed criterion in IAS 32. If the number of shares delivered varies — with the share price, with a formula, with anything — the conversion feature is not equity and the whole instrument is a financial liability. "Convertible" on the face of the instrument tells you nothing until you have run that test.

Worked example

A company issues $10m of 5% convertible preference shares at par, redeemable at par in three years or convertible into a fixed number of ordinary shares. The market rate on similar non-convertible shares is 8%.

The wrong answer. Discount at the 5% coupon: interest $500,000 × 2.723 = $1,361,500, plus $10m × 0.864 = $8,640,000. Liability $10,001,500. Equity component: nil. Discounting at the coupon rate always hands you back the issue proceeds — so the split never happens, and the marks for the equity component and the finance cost go with it.

The correct answer. Discount at the 8% market rate: interest $500,000 × 2.577 = $1,288,500, plus $10m × 0.794 = $7,940,000. Liability component $9,228,500. Equity is the residual: $10,000,000 − $9,228,500 = $771,500. Year-one finance cost is $9,228,500 × 8% = $738,280, of which $500,000 is paid in cash, leaving a closing liability of $9,466,780.

Look at that finance cost. Preference dividends on a liability-classified instrument hit profit or loss — they are not a distribution of equity. The examiner flagged that a considerable number of candidates treated them as ordinary dividends and concluded profit was unaffected. It is affected, and so is gearing.

What to do

• Run the fixed-for-fixed test before you touch the calculator. One sentence per instrument, stating whether the number of shares on conversion is fixed. That sentence scores on its own.
• Discount at the market rate for the equivalent instrument without the conversion option. If your liability component comes out equal to the proceeds, you used the coupon rate. Go back.
• Label every working. Markers award marks for relevant application even when an earlier figure is wrong — but only if they can follow the trail. Unreferenced numbers score nothing.

The numbers

SBR came in at 47% in June 2026, down from 50% in March. Question 4 is worth 25 marks and takes the investor's view — the closest thing on the paper to the question you will actually be asked at work. The examiner's advice for the next sitting was to prepare for every question, not just Q1 and Q2.

Convertible is a marketing word. Fixed-for-fixed is the accounting one.