March 2023
Equity Vs. Financial Liability
By Dolphy D’souza, Chartered Accountant
Reading Time 5 mins
Classification, measurement and presentation of financial instruments as financial liabilities or equity will give information to users of financial statements about the nature, timing and amount of future cash flows of the entity. Reclassification of a financial instrument from equity to financial liability or vice-versa would not only affect its presentation in the balance sheet but also its measurement (equity is not remeasured whereas financial liabilities are) and, may result in a remeasurement gain or loss.
This article deals with the issue of whether reclassification between financial liabilities and equity instruments should be required or prohibited for changes in the substance of contractual terms without a modification to the contract.
FACT PATTERN
An entity issues a four-year convertible bond, where the holder has the option to convert it into the issuer's equity shares after the first year, but where the conversion ratio is only fixed at the end of the first year at the lower of R6 and 120 per cent of the equity share price. Should an instrument be reclassified when the original classification might have changed but the contractual terms have not?
RESPONSE
Technical literature
Ind AS 32, Financial Instruments, Presentation
Paragraph 17 “……. a critical feature in differentiating a financial liability from an equity i
