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ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments

Zeta plc issues preference shares that pay a fixed 6% annual dividend, which the board must pay each year. The shares must be redeemed by Zeta in cash at par in five years. Under IAS 32, how should Zeta classify these shares in its own financial statements?

The shares are a financial liability because Zeta has a contractual obligation to pay fixed dividends and to redeem for cash. IAS 32 looks at substance, not legal form, so calling the instrument a share does not make it equity.

  1. AAs a financial liability, because Zeta has a contractual obligation to pay cash for both dividends and redemptionCorrect
  2. BAs equity, because the instrument is legally called a share
  3. CAs equity for the nominal value and a liability for the dividends only
  4. DAs a derivative liability measured at fair value through profit or loss

Explanation

IAS 32 classifies instruments by substance. A contractual obligation to deliver cash, both annual dividends and redemption at par, makes the instrument a financial liability. Legal form as a share is irrelevant, and splitting the instrument is not appropriate because both components are obligations.

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