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Chapter 11
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.
Illustrations and further practice
Now try TYU question 1 from Chapter 11.
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