Home › CA Final › financialreporting › financialinstruments › B Ltd. issues 10% cumulative non-redeemable pref…
B Ltd. issues 10% cumulative non-redeemable preference shares. The cumulative dividend cannot be deferred indefinitely once it accrues. Under Ind AS 32, the instrument is classified as:
AA compound financial instrument — equity for the non-redeemable principal and a financial liability for the unconditional cumulative dividend stream
BWholly equity, because non-redeemable preference shares are always equity
COutside the scope of Ind AS 32 because preference-share classification is governed by the Companies Act
DWholly a financial liability, because the cumulative dividend creates an unconditional payment obligation
Answer & Solution
Correct answer: A. A compound financial instrument — equity for the non-redeemable principal and a financial liability for the unconditional cumulative dividend stream
Where the principal is non-redeemable, the issuer has no obligation to repay it — that leg is equity. But where the issuer has no unconditional right to defer the cumulative dividend, the dividend stream meets the financial-liability definition. Ind AS 32 therefore requires the instrument to be split into a compound: liability component (present value of the obligatory dividends) and equity component (residual).
Related questions
A Ltd. defaults on an INR 10 lakh bank loan. The bank agrees to a one-time settlement of IA Ltd. holds a contractual right to exchange a financial asset for another financial assetA puttable financial instrument — one that the holder can require the issuer to redeem forY Ltd. issues a foreign-currency convertible bond. Variability of the conversion ratio thaA Ltd. enters a forward contract to repurchase a fixed number of its own equity shares forUnder Ind AS, a financial guarantee contract is:X Ltd. issues irredeemable preference shares at face value ₹10 plus premium ₹90, carrying An entity enters a contract to deliver a VARIABLE number of its own equity shares in excha