Solution

The puttable ordinary shares cannot qualify for equity classification as

a)    in addition to the put option, there is another contract between the issuer (P Limited) and holder of puttable instrument (Q Limited) whose cash flows are based substantially on profit or loss of issuer,

b)    whose contractual terms are not similar to a contract between a non-instrument holder and issuer and

c)    it has the effect of substantially restricting return on puttable ordinary shares.

If the terms of asset management contract were assessed to be similar to terms of a contract between a non-instrument holder and the issuer, it would not have precluded equity classification for puttable shares, provided other conditions are met.

The financial instrument in this case is the puttable ordinary shares issued by P Limited to Q Limited. In addition, Q Limited has entered into an asset management contract with P Limited.

Based on the information provided, it is not possible to classify the puttable ordinary shares as equity instruments. This is because the rights of the holder of these shares are not solely based on a residual interest in the assets of P Limited after deducting liabilities.

The asset management contract entered into by Q Limited with P Limited is separate from the ownership of the puttable ordinary shares. The fact that Q Limited is entitled to 50% of the profit of P Limited through this contract means that Q Limited has a contractual right to a share of the profits that is not solely based on ownership of the puttable ordinary shares. This is not consistent with the characteristics of equity instruments.

Furthermore, the fact that the management fee payable to Q Limited is significantly higher than normal commercial terms for similar contracts suggests that the arrangement may be more akin to a financial liability than an equity instrument.

Therefore, based on the information provided, it is not possible to classify the puttable ordinary shares issued by P Limited to Q Limited as equity instruments. The asset management contract entered into by Q Limited with P Limited may be more closely aligned with a financial liability than an equity instrument.