Question

Explain the factors that determine the classification of redeemable preference shares as either an equity or liability?(5marks)

Answer 1

Factors that determine the classification of redeemable preference shares as either an equity or liability

• Fixed Redemption Date- Financial Liability
• Redeemable on request of holder- Financial Liability initially
• Redeemable at the discretion of issuer- If informed formally then Financial Liability and if not informed formally then Equity
• Redeemable at the discretion of issuer BUT option for holder to convert to ordinary shares- Conversion to fixed amount then Equity and if Conversion to variable amount then Financial Liability.