Page 162 - SBR Integrated Workbook STUDENT S18-J19

Chapter 12

1.2 Debt or equity?

When issuing a financial instrument, an entity must classify it as a
financial liability or as equity according to its substance and the
definitions on the previous page.

The decision as to whether a financial instrument is a financial liability or equity has a
big impact on the financial statements.

The entity will appear less geared if the instrument is classified as
equity, which may make it seem like a less risky investment.

The treatment of interest and dividends relating to a financial instrument
must follow the treatment of the instrument itself. For example:

 Dividends paid in respect of shares classified as a liability are
charged as a finance cost through profit or loss

 Dividends paid in respect of shares classified as equity are
charged directly against retained earnings and reported in the
statement of changes in equity.

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