Page 65 - ar2012

31 December 2012
NOTESTO FINANCIAL STATEMENTS
GEO ENERGY RESOURCES LIMITED | Annual Report 2012 61
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
Convertible loans
Convertible loans are regarded as compound instruments, consisting of a debt host component and an equity
conversion option which are classifed separately as fnancial liabilities and equity in accordance with the
substance of the contractual arrangement on initial recognition. Conversion option that will be settled by the
exchange of a fxed amount of cash or another fnancial asset for a variable number of the Company’s own equity
instruments is classifed as a derivative fnancial liability. Conversion option that will be settled by the exchange of
a fxed amount of cash or another fnancial asset for a fxed number of the Company’s own equity instruments is
classifed as an equity instrument.
Where conversion option will be settled by the exchange of a fxed amount of cash or another fnancial asset for a
variable number of the Company’s own equity instruments
On initial recognition, the fair value of the liability host component is determined using the prevailing market
interest of similar non-convertible debts. The difference between the gross proceeds of the issue of the convertible
loans and the fair value assigned to the liability host component, representing the conversion option for the holder
to convert the loans into equity, is recognised separately as derivative fnancial liability.
In subsequent period, the derivative fnancial liability which represents the equity conversion option is measured at
its fair value and with fair value changes recognised in the proft or loss. The liability host component is carried at
amortised cost using the effective interest method until the liability is extinguished on conversion or redemption.
Upon conversion, the derivative fnancial liability and the carrying amount of the liability host component will be
transferred to share capital.
Where conversion option will be settled by the exchange of a fxed amount of cash or another fnancial asset for a
fxed number of the Company’s own equity instruments
On initial recognition, the fair value of the liability host component is determined using the prevailing market
interest of similar non-convertible debts. The difference between the gross proceeds of the issue of the convertible
loans and the fair value assigned to the liability host component, representing the conversion option for the holder
to convert the loans into equity, is included in equity (convertible loans reserve).
In subsequent period, the liability component of the convertible loans is carried at amortised cost using the
effective interest method. The equity component, representing the option to convert the liability component into
ordinary shares of the Company, will remain in convertible loans reserve until the conversion option is exercised,
in which case the balance stated in convertible loans reserve will be transferred to share capital. Where the option
remains unexercised at the expiry date, the balance stated in equity reserve will be released to retained earnings.
No gain or loss is recognised in proft or loss upon conversion or expiration of the option.
Transaction costs that relate to the issue of the convertible loans are allocated to the liability host and equity or
derivative liability components in proportion to the allocation of the gross proceeds. Transaction costs relating to
the equity components are charged directly to equity. Transaction costs relating to the liability components are
included in the carrying amount of the liability and amortised over the period of the convertible loans using the
effective interest method.
Derecognition of fnancial liabilities
The Group derecognises fnancial liabilities when, and only when, the Group’s obligations are discharged,
cancelled or expired.