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Accounting

Financial Instruments

QuestionAnswer
Cumulative pref share’s dividends accumulate if not enough profit → carried forward to next year
Convertible pref shares converted into ordinary shares or any other instrument
Redeemable pref shares repaid in future just like a normal loan
Financial asset 1)Cash, or (2)Equity instrument of another entity, or (3)Contractual right → receive cash or another fin. asset, or
Financial asset (4)Contractual right → exchange fin. assets/liabilities with other entities under favourable conditions, or (5)Contract that will be settled in entity’s own equity instruments (e.g. shares) other than for a fixed number of equity instrument
Financial liability Contractual obligation
Financial liability (1)Deliver cash or another fin. asset to another entity, or
Financial liability (2)To exchange fin. assets/liabilities with other entities under unfavourable conditions, or (3)That will be settled in the entity’s own equity instruments (e.g. shares) other than for a fixed number of equity instruments
issuer does not have an unconditional right IS NOT EQUITY!
If issuer will settle using its own equity variable number of equity instruments it is FINANCIAL LIABILITY
compulsory redeemable or by choice of the holder it is FINANCIAL LIABILITY
If redeemable by choice of the issuer equity (or a compound instrument)
Held for trading The instrument was acquired primarily with the purpose of trade (sell in the near future), or The instrument is held in a portfolio with evidence of short-term profit-taking (speculative purposes)
When is FV = 0 When shares are compulsory convertable
Created by: ModupeMakoanyane