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.

Ind AS Accounting Standards