IAS32- classification

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Leo
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IAS32- classification

Post by Leo »

Hi everyone,

If a contract specifies that the shares issued will pay a fixed dividends in the next 5 years, but the shareholder has can choose freely whether to convert or not those shares into cash. Is it considered as an equity instrument or a financial liability?

Thanks
JRSB
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Re: IAS32- classification

Post by JRSB »

What's your view Leo? ;)
Leo
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Re: IAS32- classification

Post by Leo »

just a practical example.

Company A issues 100 shares with nominal value of 1euro (which is the nominal value of other existing shares), for 10 euros each. For a consideration of a 1 000 euros.
So Scenario 1:
Each share will give dividend of XX each year until year number 5, and shares will be redeemed against cash at the value at the maturity date.

For me, this is a financial liability in its entirety. Because the issuer has a contractual obligation to deliver cash (dividend + redeemed shares at maturity year number 5)

Scenario 2:
Each share will give dividend of xx for the first 5 years after issue and at year 5, the holders have the option to redeem the shares or not at the fair value.

For me, this is still a financial liability in its entirety. Because the issuer cannot avoid to deliver cash if the holders decide to redeem the shares.

Scenario 3:
Each share will give dividend of XX for the first 5 years, that's it.

For me, this is still a financial liability because the issuer cannot avoid to deliver cash, even thought the dividend maybe be something not material, like 0.01 EUROS per share. (I'm not sure about this one)

Scenario 4:
each share will give the same rights than other existing shares. Only the dividends for the new issued shares must be paid first to the holders, then if any left, to the other existing shareholders.

For me, this is not a financial liability but a equity instrument because even though the dividend are paid first to the holders of the new shares, it's still the issuer that has the discretion to pay the dividends or not.



are the above conclusion correct or not? and which one please ?
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Marek Muc
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Re: IAS32- classification

Post by Marek Muc »

have a read:
https://ifrscommunity.com/knowledge-bas ... vs-equity/

and let us know what's left unresolved and why
Leo
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Re: IAS32- classification

Post by Leo »

did it and also the post where ExIFRS, you, Marea and JRSB discussed whether a preference shares should be considered as a liability or equity.

still not clear for me for the scenario 3. Is it entirely equity, liability or partially?

Imagine that you issue one million worth of shares, with mandatory payment of dividend of only 1 euros next year.

Does this make the insturment to be classified as liability in it's entirety ? Because yes, there is no avoidable obligation for the issuer to pay cash, isn't ?
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Marek Muc
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Re: IAS32- classification

Post by Marek Muc »

Fully liability in this case.

Is this a real life scenario? What's behind this nominal dividend?
Leo
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Re: IAS32- classification

Post by Leo »

Thanks Marek, no, is not, but just a stress test to push the scenario to the extreme to see if the theory can still be applicable and make sense nonetheless.
JRSB
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Re: IAS32- classification

Post by JRSB »

I guess there's a point at which the substance of the arrangement is equity even if there's a guaranteed 'dividend', perhaps where the existence of the dividend makes no economic difference to shareholders, though one for arguing with the auditors rather than in applying the standards correct technically. Is there an imagined scenario where such an arrangement would be beneficial? If it was to incentivise investment in the first place, then that would imply a change in economic value so wouldn't be an immaterial factor.
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