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X Co. Ltd. issues debentures redeemable at a fixed amount at the end of 10 years; 15% interest is payable AT THE DISCRETION of the issuer. Under Ind AS 32, the instrument is classified as:
AWholly an equity instrument because the interest is discretionary
BA compound financial instrument — liability for the mandatory principal redemption + equity for the discretionary interest
COutside the scope of Ind AS 32 because the interest is discretionary
DWholly a financial liability because debentures are always liabilities
Answer & Solution
Correct answer: B. A compound financial instrument — liability for the mandatory principal redemption + equity for the discretionary interest
Para 15 of Ind AS 32 requires COMPONENT-BY-COMPONENT evaluation. The mandatory principal redemption at a fixed date is a contractual obligation to deliver cash — a financial liability component. The interest payable at the issuer's discretion creates no contractual obligation — an equity component. Together: a compound financial instrument, with both components separately recognised.
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