MNS Ltd issues redeemable preference shares with cumulative dividend ratio at 7%. MNS Ltd has to pay dividend on the shares every year and has the contractual obligation to redeem the shares for cash at the expiration date.How MNS Ltd should recognise the preference shares?Group of answer choicesRecognise the preference shares as financial assetsRecognise the preference shares as financial liabilitiesRecognise part of the preference shares as financial liabilities and part of them as equity instrumentsRecognise the preference shares as equity instruments
Question
MNS Ltd issues redeemable preference shares with cumulative dividend ratio at 7%. MNS Ltd has to pay dividend on the shares every year and has the contractual obligation to redeem the shares for cash at the expiration date.How MNS Ltd should recognise the preference shares?Group of answer choicesRecognise the preference shares as financial assetsRecognise the preference shares as financial liabilitiesRecognise part of the preference shares as financial liabilities and part of them as equity instrumentsRecognise the preference shares as equity instruments
Solution
MNS Ltd should recognise the preference shares as financial liabilities.
Here's why:
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The redeemable preference shares issued by MNS Ltd are a type of financial instrument that the company has a contractual obligation to pay dividends on every year. This makes them similar to a debt instrument, such as a bond, where the issuer has a contractual obligation to pay interest and principal.
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Furthermore, MNS Ltd also has a contractual obligation to redeem the shares for cash at the expiration date. This means that the company has to buy back the shares at a certain price in the future, which is another characteristic of a financial liability.
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According to the International Financial Reporting Standards (IFRS), a financial liability is defined as a contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity. The redeemable preference shares issued by MNS Ltd meet this definition.
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Therefore, MNS Ltd should recognise the preference shares as financial liabilities in its financial statements.
Similar Questions
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