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in solution it states that B shares of Lidan will be classified as a liability because the value of the own share settlement alternative substantially exceeds that of the cash settlement option
Own shares- is that shares that are not for issuing?
own shares is 2m x $1 = $2m
cash settlement 1m x $1 = $1own shares exceeds cash so it is a liability, is this correct?
No, own shares are the shares of the company that they could issue in settlement – that is, they are the company’s own shares
Ok?
thanks. because the own shares exceeds the cash does it mean that it is a liability? i.e company issued $2m equity and $1m liability. there will be a difference of $1m, is this classified as liability?
The B shares are coming up for redemption in two years’ time. At the moment they are shown as a liability (at least, they should be because they are not equity, but the question merely states that they are classed as a financial liability)
Are they equity or are they a liability. The share-settled route results in an issue of shares that has not seen its price fall below $5 since the company was formed whereas the cash-settled route involves a payment of $2m . Clearly this is the preferable option for the company and it will have to do one or the other in the next two years. So classify it as a liability
Is that ok?
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