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A debt for equity swap involves a creditor converting debt owed to it by a company into equity in that company. The effect of the swap is the issue of the equity to the creditor in satisfaction of the debt, such that the debt is discharged, released or extinguished.
With convertible debt, a business borrows money from a lender or investor where both parties enter the agreement with the intent (from the outset) to repay all (or part) of the loan by converting it into a certain number of its preferred or common shares at some point in the future.
In ance with Section 62(3) of the Companies Act of 2013, a Company may convert the loan into equity after obtaining the approval from its members by way of special resolution. We undertook this task for a client primarily engaged in the business of software products and software services.
The accounting treatment of debt-equity swap involves debiting the entire debt component of the business, which is earmarked for swap purposes,s and crediting the same into a new equity issue account. This journal entry extinguishes the debt liability and generation of equity capital.
How a Debt-to-Equity Swap Works. With a debt-to-equity swap, the lender converts a loan amount or a loan amount represented by outstanding bonds into equity shares, thus converting debt to equity. No actual cash is exchanged in the debt-to-equity swap.