Solution

This instrument provides for mandatory fixed dividend payments and redemption by the issuer for a fixed amount at a fixed future date. Since there is a contractual obligation to deliver cash (for both dividends and repayment of principal) to the preference shareholder that cannot be avoided, the instrument is a financial liability in its entirety.

The financial instrument in this case is a preference share issued by A Limited to B Limited. The preference share has the following features:

1. It is redeemable after 10 years from the date of issue.
2. It entitles the holder to a cumulative dividend of 15% p.a.
3. The rate of dividend is commensurate with the credit risk profile of the issuer.

Based on these features, the preference share can be classified as a financial liability. This is because the holder of the preference share is entitled to receive a fixed rate of return (i.e., cumulative dividend of 15% p.a.) and the share is redeemable at a fixed date in the future.

Furthermore, the fact that the rate of dividend is commensurate with the credit risk profile of the issuer indicates that the preference share is a form of debt financing. The rate of dividend is likely to be higher if the credit risk of the issuer is perceived to be higher, which is a characteristic of debt instruments.

Therefore, the preference share issued by A Limited to B Limited is a financial liability and represents a form of debt financing for A Limited.