Consequences of treating equity vs liability

What are the consequences of treating a contract as equity and how its treatment is different if treated as liability?

The consequences of treating particular contract as equity are as follows:

Treatment when the financial instrument is equity:

  1. Any consideration received (such as the premium received for a written option or warrant on the entity’s own shares) is added directly to equity.
  2. Any consideration paid (such as the premium paid for a purchased option) is deducted directly from equity.
  3. Changes in the fair value of an equity instrument are not recognised in the financial statements.
  4. Income and expenses on instruments classified as equity instrument are taken directly to equity.
  5. Gains and losses on redemptions, refinancing, etc, of financial instruments classified as equity are shown as movements in equity.

Treatment when the financial instrument is a liability:

  1. Income and expenses on instruments classified as liabilities are reported in the statement of comprehensive income.
  2. Gains and losses on redemptions, refinancing, etc, of such instruments are also reported in comprehensive income.
  3. Example: Dividends on preference shares classified as liability are shown as expense like interest on bonds.

Own use exemption as per the Accounting Standard

Own use exemption as per the Accounting Standard What is meant by own use exemption as per the Accounting Standard? Contracts that are entered into for the purpose of the receipt or delivery of a non-financial item for the entity’s own use is excluded from the scope of Accounting Standards for financial …
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Classification of Foreign Currency Convertible Bond (FCCB)

Classification of Foreign Currency Convertible Bond (FCCB) An entity has issued a foreign currency convertible bond (FCCB). The Bond is denominated in foreign currency and would be converted into a fixed number of equity shares. Will this be treated as equity instrument or as a financial liability? Contracts that will be settled …
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Bifurcation of compound financial instruments

Bifurcation of compound financial instruments Should the entity monitor a compound financial instrument in bifurcating such instrument into liability and equity component constantly and account for the same on every reporting period? A compound financial instrument should be evaluated for the terms of the financial instrument to determine whether it contains both …
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What are treasury shares and how are these presented

What are treasury shares and how are these presented What are treasury shares and how are these presented in the financial statements? If an entity acquires its own equity instruments, these instruments are known as ‘treasury shares’ and are deducted from equity. No gain or loss shall be recognised in profit …
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