CA Anuj Agrawal
CA Anuj Agrawal

After the introduction of IFRS (called IND-AS in Indian perspective) in India, now all instruments that are issued by an entity will not accounted just based on their legal form. E.g. Preference shares are being accounted as Equity in general in the current scenarios however after the introduction of IFRS it will be judged/ evaluated  based on certain facts which can be analyzed in the purview of IND-AS 32 which says that the  instrument will be treated as Equity only when the issuer has unconditional right to avoid payment (in cash or other financial instrument) or if it settled through own equity instruments for fixed amount of cash or fixed number of entity’s own equity shares. All other cases it will be treated as liability.

Like some of the very common kind of instances which we generally find attached within the contractual agreement of these instruments which are being issued by an entity-

  • Instruments that are redeemable at the Option of Holder will be treated as Liability as the issuer does not have unconditional right to avoid such payments,
  • Dividends on non-redeemable preference share that are not discretionary will be again treated as liability as the entity cannot avoid unconditional settlement however if such dividends which are at the discretion of an issuer will be treated as Equity,
  • Some instrument which has feature to become redeemable only on the occurrence of some uncertain future event (e.g.based on stock market indices, some interest rates etc) that is out of the control of both holder & Issuer then it will be treated as liability however as per the interpretation of standards it further says that if the transaction is not genuine or if this redemption is required only on the liquidation of an entity then it can be interpreted as Equity,
  • There are some instruments where local law require to pay some amount as dividend then it will not be treated as unavoidable event or in other words there is no contractual obligation for this payment and hence it can be interpreted to treat as Equity,
  • Where an instruments contains a clause stating that the redemption of the instrument will happen only upon the liquidation of the entity then it will be treated as Equity,
  • Puttable instruments which are redeemable at the option of Holder and issuer does not have right to avoid such settlement will be treated as Liability however if the conditions says that the such put option can only be exercised at the time of liquidation then it may be treated as Equity,

This is just a glimpse of presentation of Financial Instruments which normally being shown as per its legal form and most of the cases we end up making it as Equity.

Hence there would be lot more careful consideration (to study entire arrangement of the Instrument before reaching to the conclusion either its Equity or Liability) would be required to carry out such presentation for financial Instruments because it may change entire structure of the Statement of Financial Position (called as Balance Sheet).

One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.

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