554 Accounting: Business Reporting for Decision Making
13.8 Discuss hybrid financial instruments.
Hybrid debt securities are securities that have characteristics of both debt and equity. The principal
hybrid securities are convertible notes and convertible preference shares. Both convertible notes
and convertible preference shares convert to the issuer’s ordinary shares. The principal difference
between the two is that convertible notes pay interest, and convertible preference shares pay divi-
dends, which are usually fully franked. With both types of securities, however, the issuer receives
cash only on issue. Eventual conversion to ordinary shares is a cashless transaction.13.9 Describe the use of international finance.
Countries like Australia and New Zealand have traditionally relied heavily on overseas capital as
a source of funds to assist in their development. The need for international capital stems directly
from their inability to save enough, and therefore to provide sufficient homegrown capital. Foreign
investment in industry occurs when overseas investors make direct equity investments and lend
directly, or make portfolio investments in equities or debt.Key terms
Convertible notes Notes that convert to the issuer’s ordinary shares.
Convertible preference shares Shares that convert at maturity to the issuer’s ordinary shares.
Corporate bonds Unsecured loans that are contracted directly with investors in the debt markets and
normally available only to entities with acceptable credit ratings.
Current assets Cash and other assets that are expected to be converted to cash or used in the entity
within one year or one operating cycle, whichever is longer.
Current liabilities Obligations that can reasonably be expected to be paid within one year or one
operating cycle.
Debentures Loan instruments that are normally secured by a fixed or floating charge over assets.
Direct investment Capital invested in an entity by an investor with significant influence over the key
policies of the entity.
Factoring Gives the lender the right to collect the cash owing on invoices.
Finance leases Non-cancellable contractual obligations to make payments in return for the use of an
asset for the majority of its useful life.
Fully drawn advances (FDAs) Loans initially drawn down to the full amount and repaid over the
term of the loan by a fixed repayment schedule.
Hedging principle Matching the maturity of the source of funding with its use.
Hire-purchase agreement Involves a financial institution buying the equipment required by the
customer, then hiring it to the customer for use during the agreed period in return for hire/rental
payments.Hybrid debt securities Securities that have characteristics of both debt and equity.
Insolvent entity Entity that is unable to pay its bills or meet its financial obligations on time.
Instalment loans Loans with fixed repayment schedules that are negotiated at the outset.
Lease Contract by which an owner of property allows another person or entity the use of the asset.
Lessee Person or entity who leases a property.
Lessor Owner of a leased property.
Liquidity Ability of an entity to meet its short-term financial commitments.
Net working capital Current assets less current liabilities.
Non-renounceable rights issue Rights issue where investors are not able to sell the rights even though
they may decline the right to subscribe more funds.
Novated lease Involves a three-party agreement between an employee, an employer and a financial
institution to provide a motor vehicle to the employee as part of a salary package.
Operating leases Contractual agreements that are cancellable upon given notice and tend to be of
much shorter term than the useful life of the asset.