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Hello sir, what is difference between financial liability or equity instruments? How these will be classify in IAs 32? What is substance and contractural agreement ?
For example 1000 loans notes can be converted in to variable no of shares , is financial liability ?? How?
“Converted into a variable number – how?”. Because the terms of conversion are based on a varying benchmark so, at the date of issue, we cannot predict how many shares will be involved in the conversion
“Fixed number of shares are compound instrument??” Because we can calculate how much cash flow is involved in the servicing of the loan element and thus the difference between that present value of future cash flows related to the loan when deducted from the face value of the loan will give “the missing figure” that is classified as equity
Does that answer you?
Ok sir Thanku… We will classify any instrument being a issuer, any condition attached with it for liability? Condition in term of cash
I mean there is contractual obligation for liability, and not for equity ? Wat does it mean
If there is a contractual obligation, then that is a liability. This represents an amount that HAS to be paid.
In a mixed / compound instrument there are two elements – one is the liability and the second is equity.
We calculate the present value of the contractual payments due over the life of the instrument and compare that with the face value of the instrument. Thinking about that face value, only the present value of the contracted debt will be paid so the remainder is not liability – it’s equity
Does that make it any clearer?
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