Page 163 - SBR Integrated Workbook STUDENT S18-J19
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Financial instruments
Example 1
Debt or equity?
On the reporting date of 31 October 20X5, Ivy received $10 million from a
large investor and, in return, issued 10 million B-class shares. Ivy is obliged to
pay the investor annual dividends of $1 million in arrears over the next three
years. Ivy must redeem the shares in cash on 31 October 20X8.
On the same date, Ivy received $5 million from another investor. Ivy will issue
the investor 5 million ordinary shares in two years’ time.
The directors have recorded the cash proceeds from both share issues but
have posted the other side of the entry to a suspense account.
Discuss whether the financial instruments should be classified as debt
(a financial liability) or equity.
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