Home › CA Final › financialreporting › equityvsliability › A Ltd. issues preference shares redeemable at th…
A Ltd. issues preference shares redeemable at the end of 10 years and carrying a 15% p.a. CUMULATIVE dividend (commensurate with credit risk). Under Ind AS 32, the instrument is classified as:
AWholly a financial liability — there is a contractual obligation to deliver cash on both the mandatory cumulative dividend and the principal redemption
BA compound financial instrument — split between equity and liability components
COutside the scope of Ind AS 32 because preference shares are equity per the Companies Act
DWholly an equity instrument — preference shares are equity by their name
Answer & Solution
Correct answer: A. Wholly a financial liability — there is a contractual obligation to deliver cash on both the mandatory cumulative dividend and the principal redemption
Both legs create unconditional contractual obligations on the issuer: mandatory redemption at year 10 AND mandatory cumulative dividend. Neither can be avoided. Therefore the entire instrument is a financial liability — no equity component to split. The name ("preference share") and Companies Act treatment do not override Ind AS 32's substance test.
Related questions
A puttable ordinary share otherwise qualifies for equity classification, EXCEPT that the hWhen an instrument is reclassified from FINANCIAL LIABILITY to EQUITY under Ind AS 32 (becPQR Ltd. issues a call option to ABC Ltd. that allows ABC to buy PQR's equity at ₹100 per Restrictions like LACK OF ACCESS TO FOREIGN CURRENCY or NEED FOR REGULATORY APPROVAL to maLMN Ltd. issues preference shares redeemable in 5 years for cash. The issuer also has the D Ltd. issues preference shares to G Ltd. The HOLDER has an option to convert these preferT Motors Ltd. has issued two classes of puttable ordinary shares: ordinary shares (one votP Ltd. has issued puttable ordinary shares to Q Ltd. Q Ltd. has also entered into an asset