Solution

In the above case, two main characteristics of the preference shares are:

i)      Preference shares carry dividend, which is payable only when Company declares dividend on equity shares

ii)     Preference share are irredeemable.

Analyzing the definition of equity, an instrument meets definition of equity if:

a)    It contains no contractual obligation to pay cash; and

b)    Where an instrument shall be settled in own equity instruments, it’s a non-derivative contract that will be settled only by issue of fixed number of shares or a derivative contract that will be settled by issue of fixed number of shares for a fixed amount of cash.

In the above instrument, there is no contractual obligation on the Company to pay cash since:

i)      Face value is not redeemable (except in case of liquidation); and

ii)     Dividend is payable only if Company declares dividend on equity shares. Since dividend on equity shares is discretionary and the Company can choose not to pay, Company has an unconditional right to avoid payment of cash on preference shares also. Hence, preference shares meet definition of equity instrument.

Solution:

The financial instrument in this case is the irredeemable preference shares issued by Silver Limited.

To analyze the nature of this instrument, we need to consider the classification, measurement, and disclosure requirements under IAS 32 and IFRS 9.

Classification:

The preference shares would be classified as equity instruments under IAS 32, as they represent a residual interest in the assets of the company after all other liabilities have been settled. They do not meet the definition of financial liabilities or equity liabilities, as they do not involve a contractual obligation to deliver cash or another financial asset to another entity.

Measurement:

The preference shares would be initially measured at fair value, which is the sum of the face value and premium paid by the investors. Subsequently, they would be measured at the same amount, unless there is evidence of impairment or the company has an obligation to pay dividends.

In this case, the preference shares carry a non-cumulative dividend of 8% per annum, which means that if the company does not declare dividends in any particular year, the preference shareholders would not receive any dividend for that year. The non-cumulative nature of the dividend means that the unpaid dividend does not accumulate and cannot be claimed in future years.

Disclosure:

The company would need to provide disclosures related to the nature and terms of the preference shares in its financial statements. This would include information about the rights, preferences, and restrictions attached to the shares, the dividend policy, and any redemption or conversion features.

Overall, the irredeemable preference shares would be evaluated as equity instruments under IAS 32 and measured at their initial fair value. The non-cumulative nature of the dividend means that the preference shareholders would not receive any dividend if the company does not declare dividends in any particular year. The company would need to provide appropriate disclosures in its financial statements.

The preference shares do not contain any contractual obligation to pay cash, and their dividend payment is dependent on the discretion of the company to declare dividends on equity shares. Therefore, the preference shares meet the definition of equity instrument under IAS 32.