Elan Corporation (ELN)

As permitted under IFRS 1, “First-time Adoption of International Financial Reporting Standards,” (IFRS 1), we adopted IAS 32, “Financial Instruments: Disclosure and Presentation,” (IAS 32) and IAS 39, “Financial Instruments: Recognition and Measurement,” (IAS 39), from 1 January 2005 and as a result, our accounting treatment of convertible debt changed from 1 January 2005 onwards. Prior to 1 January 2005, we accounted for our 6.5% Convertible Notes on an amortised cost basis until extinguished on conversion or maturity, with no separate recognition of the conversion option. From 1 January 2005, convertible notes are analysed into a debt component and a separate conversion option component. The initial fair value of the debt portion of the convertible notes is determined on the issue date using a market interest rate for an equivalent non-convertible note. The resulting difference between this discounted amount and the principal amount of the debt represents the initial fair value of the conversion option. The debt portion is initially recorded as a liability at fair value, net of the discount and issuance costs, which is accreted to the principal amount of the debt up to maturity of the notes using the effective interest rate method. The effective interest rate of the 6.5% Convertible Notes is 15.9%. The conversion option is classified as a liability if it may be settled by either party other than by the exchange of a fixed amount of cash for a fixed number of the entity’s own equity instruments. The conversion option included in our 6.5% Convertible Notes contained a cash settlement provision, which allowed us to choose to settle the holders’

Elan Corporation, plc 2005 Annual Report  35