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Hi Mike,
looking at the articles, I have read one of the aerticles debt v equity, it mentions that equity is only a financial instrument if it includes no contractual obligation to deliver cash or another financial asset to another equity. can you please explain this as id ont really understand.
the linnk are as follows: https://www.accaglobal.co.uk/en/student/acca-qual-student-journey/qual-resource/acca-qualification/p2/technical-articles/when-does-debt-seem-to-be-equity-.html
thank you
“A financial instrument is an equity instrument only if the instrument includes no contractual obligation to deliver cash or another financial asset to another entity, and if the instrument will or may be settled in the issuer’s own equity instruments.”
This is an extract from the link you sent and it’s actually different than your quote
At the start of the paragraph in the article (5th paragraph for those of you reading it for the first time) it states “The key feature of debt is that the issuer is obliged to deliver either cash or another financial asset to the holder.”
Where we have a financial instrument that contains contractual terms whereby fixed amounts are payable on specific dates, then that’s a debt instrument.
The article goes on and says: “In contrast, equity is any contract that evidences a residual interest in the entity’s assets after deducting all of its liabilities.” which is the definition of Equity from the Framework. So, a financial instrument is an equity instrument only if there are NO contractual obligations to make specific payments on specific dates in the future ie it is an equity instrument if it satisfies the definition of equity – that is “entitled to a residual interest in the assets of the company after ALL its liabilities have been settled”
OK?
thanks alot.
but in the article it staes that the preference shares are converted at a fixed umber of sahres and a specificed date, there is a contractual obligation here and should be classified as debt?
Yes, agreed, preference shares are normally treated as debt – if for no other reason, they are preference shares and therefore do not satisfy the definition of equity (residual interest after all others have been paid)
ok the article does state it is treated as equity, but i think debt will be the correct criteria. I think if the debt and equity in uncorrectly classified then this can lead to inconsistency in terms of financial ratios and for the preparers of the financial statements.
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