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Sir this particular requirement is same as Example 1 of the Financial Instruments chapter that is Debt vs Equity. The scenario and requirement is identical with no change.
My doubt is that in OT notes the ‘B’ shares have been classified as equity which is sensible and understandable but in BPP kit it says the B shares needs to be classified as liability. I didn’t understand the reason why they classified as such.So what’s the correct classification of the B shares?
I think we’ve been tampering with this question and not quite followed it through.
It pains me to say, but I have to go with the BPP answer – we’ll correct this for next year.
Thank you for pointing this out.
Okay can you please elaborate and make me understand as to what they are trying to say in the BPP kit. I read twice but couldn’t understand it.
Sir but i don’t understand why OT answer is wrong. Its quite sensible and logical.
I am (sort of) persuaded by both answers. My own view is that the company would treat it as a liability ONLY if there was a PAST PRACTICE OF SETTLING SIMILAR INSTRUMENTS IN CASH
The examiner has, in the past, written questions which went both ways- liability or equity
When he wrote this question in 2014, he went down the BPP route – liability
There is currently an ED trying to resolve this issue
When I’m next teaching SBR in a couple of weeks I will get the view of a couple of colleagues
I’ll post again thenPS In the exam, if it’s worth 3 marks, most of the marks are for definitions – so, as long as you define financial liability and equity, all will be well
In my view the answer given in OT notes is from the investor’s perspective where the share redemption option offers an advantage for the investor.
And the bpp kit is right from the Company’s perspective.I think that was the intention. Problem = only one perspective can appear in FS
Sorry but im just tempted to know that if the question appears in the exam for 6 marks then would it be right if i answer from investor’s perspective and say that it should be classified as shares?
Or if you are unsure of it then could you please ask your colleague and let me know as i have a gut feeling that it may appear in the exam and i dont want to lose the precious marks. :p
Finally tracked this down.
There was a UITF pronouncement.
Liability if would be established if a financial instrument provides that on settlement the entity will deliver either cash or its own equity instruments whose value is determined to exceed substantially the value of the cash.In terms of exam, as I said before, they are testing your knowledge of definitions of financial liability and equity and ability to discuss them – your answer doesn’t necessarily havre to agree to the examiner’s.
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