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LMN Ltd. issues preference shares redeemable in 5 years for cash. The issuer also has the option to settle instead by transferring a commercial building whose fair value is SIGNIFICANTLY HIGHER than the cash settlement amount. Under Ind AS 32, the preference shares are:
AA compound instrument split between equity and a contingent liability
BOutside Ind AS 32 because of the non-financial settlement option
CA financial liability — the issuer can avoid cash settlement only by settling the non-financial obligation
DAn equity instrument because the issuer can choose the settlement mode
Answer & Solution
Correct answer: C. A financial liability — the issuer can avoid cash settlement only by settling the non-financial obligation
Para 20 of Ind AS 32 — when the issuer can only avoid the cash-delivery obligation by settling a non-financial obligation, the instrument is still a financial liability. The fact that the building's value is higher (making the cash route economically preferable) does not change classification — the contractual cash obligation persists.
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