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A Ltd. issues compulsorily convertible preference shares (CCPS) at ₹100 each. After 10 years they convert into equity shares whose NUMBER VARIES with the equity-share fair value at conversion. Under Ind AS 32, the CCPS are classified as:
AA compound instrument — half liability, half equity
BOutside scope as the conversion ratio is contingent on a future fair value
CA financial liability — settled in a variable number of own equity shares (the issuer is using its equity as currency)
DEquity — they are mandatorily convertible into equity shares
Answer & Solution
Correct answer: C. A financial liability — settled in a variable number of own equity shares (the issuer is using its equity as currency)
A non-derivative that is settled by delivering a VARIABLE number of own equity shares fails the condition (B) requirement of Ind AS 32.16. The issuer is essentially using its own equity as a settlement currency. Despite the legal name ("preference share") and mandatory conversion, substance dictates classification as a financial liability. If the conversion ratio were FIXED, equity classification would apply.
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