Page 61 - F2 Integrated Workbook STUDENT 2019
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Financial instruments
How do you think we should classify the following specific methods of
financing an entity?
Instrument Classification
Ordinary shares Equity
Loans Liability
Debentures/loan stock/loan Liability
notes/bonds
Preference shares Depends!
If obligation to deliver cash exists = liability
e.g. redeemable preference shares or cumulative
preference shares.
If no obligation exists = equity
e.g. irredeemable preference shares with dividends
that are not cumulative.
Convertible loans Both!
(loans that can be turned into Hybrid instruments contain both liability
shares in the future) components and equity components.
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