This excerpt taken from the ELN 6-K filed Mar 31, 2006.
Effective 1 January 2005
We have adopted IAS 32 and IAS 39 effective 1 January 2005, with no restatement of comparative information in prior periods. With the adoption of IAS 32 and IAS 39, the 6.5% Convertible Notes are analysed into a debt component and a separate embedded conversion option component. Under IFRS, prior to 28 October 2005, the conversion option in the 6.5% Convertible Notes was classified as a derivative within liabilities and fair valued through the income statement at each reporting period. The finance cost for the 6.5% Convertible Notes also includes an amortisation charge for the discount between the initial fair value of the debt component of the 6.5% Convertible Notes and the proceeds received on issue. This discount under IFRS is determined on the issue date using a market interest rate for an equivalent non-convertible note, and is amortised along with issuance costs up to the maturity of the notes using the effective interest rate method, such that the discounted carrying value of the debt will accrete to the principal amount over the period to the maturity date. This initial discount, which reflects the initial fair value of the conversion option, amounted to $128.7 million for the issue as a whole, of which $71.7 million, approximately 55%, related to the remaining principal amount of $254.0 million outstanding at 31 December 2005. Of this $71.7 million, an amount of $46.4 million remains unamortised at 31 December 2005.
On 28 October 2005, we removed the cash settlement feature from the Convertible Notes and as a result, the value of the remaining conversion option is fixed as of 28 October 2005 at $91.8 million. It will not be subsequently remeasured after this date, and has been transferred from liabilities to shareholders equity, being the equity portion of a compound financial instrument. This $91.8 million increase in shareholders equity represents the initial fair value of $71.1 million of the conversion option (initial fair value discount on the debt) on the remaining $254.0 million of principal amount of the 6.5% Convertible Notes, plus the increasing of shareholders equity, upon the removal of the cash settlement feature, for the net cumulative mark-to-market loss of $20.7 million on the remaining principal amount (that had previously been expensed to shareholders equity). As described above, the $71.1 million is being amortised to interest expense over the period to the maturity date using the effective interest rate method. The effective interest rate of the 6.5% Convertible Notes is 15.9%. Of this $71.1 million, $46.4 million remains unamortised at 31 December 2005.
Under U.S. GAAP, there is no separate recognition of the conversion option, as it is deemed to be clearly and closely related to the debt instrument. As a result, there is no fair value movement on the U.S. GAAP income statement, nor an additional finance charge for the discount arising on separation of the instrument. Timing differences may also arise on net gains/(charges) on debt retirements, since under U.S. GAAP such gains/(charges) are recorded only as such transactions occur, whereas the requirement under IFRS to fair value the conversion option during each reporting period means that such gains/(charges) may have been partially recorded in prior period(s).
The difference in shareholders equity of $46.4 million between U.S. GAAP and IFRS at 31 December 2005 represents the remaining unamortised initial fair value discount. This difference will decline over time to $Nil at maturity as this discount is amortised to interest expense under IFRS using the effective interest rate method.
154 Elan Corporation, plc 2005 Annual Report