Tea Ltd is a public company whose common shares are traded in the stock market. Tea...

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Tea Ltd is a public company whose common shares are traded inthe stock market. Tea recently issued various financial instrumentsto the public, as described below.
(a) 7% convertible bonds with a facevalue of $1,000 and maturity date on December 31, 2027. Each bondcan be converted into whatever number of Tea’s common shares suchthat the value of the common shares which the holder receives fromconversion is equal to $1,500.
5% convertible, cumulative, redeemable preference shares. Eachpreference share can be converted into 5 of Tea’s common shares atthe conversion price of $10 per common share. The conversion periodis from January 1, 2022 to June 30, 2026. At the date of issue ofthe convertible preference shares, Tea’s common shares were tradedat $50 per share.
If the preference shares are notconverted by June 30, 2026, it will be mandatorily redeemed on July1, 2026 at the redemption price of $300 per share.
2% perpetual bonds (bonds with no maturity date which pay astream of interest forever as long as the issuer still exists). Thebonds entitle the holders to a 2% interest to be paid annually inarrears on December 31. In addition, the holders can receive therepayment of principal when the issuer (Tea) liquidates in thefuture.
Required: Discuss the classification of thefinancial instruments above.

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As per IAS 32 on Presentation of Financial instruments financial instruments would be classified as a financial liability or an equity based on the substance of the contract IAS 32 defines a Financial liability and Equity as follows A Financial liability is any liability that is 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 unfavourable to the entity or a contract that will or may be settled in the entitys own equity instruments and is a nonderivative See Answer

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Tea Ltd is a public company whose common shares are traded inthe stock market. Tea recently issued various financial instrumentsto the public, as described below.(a) 7% convertible bonds with a facevalue of $1,000 and maturity date on December 31, 2027. Each bondcan be converted into whatever number of Tea’s common shares suchthat the value of the common shares which the holder receives fromconversion is equal to $1,500. 5% convertible, cumulative, redeemable preference shares. Eachpreference share can be converted into 5 of Tea’s common shares atthe conversion price of $10 per common share. The conversion periodis from January 1, 2022 to June 30, 2026. At the date of issue ofthe convertible preference shares, Tea’s common shares were tradedat $50 per share.If the preference shares are notconverted by June 30, 2026, it will be mandatorily redeemed on July1, 2026 at the redemption price of $300 per share. 2% perpetual bonds (bonds with no maturity date which pay astream of interest forever as long as the issuer still exists). Thebonds entitle the holders to a 2% interest to be paid annually inarrears on December 31. In addition, the holders can receive therepayment of principal when the issuer (Tea) liquidates in thefuture. Required: Discuss the classification of thefinancial instruments above.