QUESTION 28 Illustration 18: Share swap arrangements Acquirer Limited enters into an arrangement with shareholders of Target Limited wherein Acquirer Limited will purchase shares of Target Limited in a share swap arrangement. The share swap ratio is agreed as 1:5 i.e. 1 equity share of Acquirer Limited for every 5 equity shares held in Target Limited. Examine whether the financial instrument will be classified as equity.

Solution

Such arrangements will not meet the condition for classification as “equity instrument” since the contract will be settled by delivery of fixed number of Acquirer Limited’s own equity instruments against a variable amount of cash i.e. market value of Target Limited’s equity shares.

Such a contract will likely result in a derivative liability or asset for both the parties.

In this scenario, the share swap arrangement does not meet the condition for classification as an equity instrument. As the number of Acquirer Limited's own equity instruments to be delivered will vary based on the market value of Target Limited's equity shares, it is a derivative that will be recognized as a financial liability or asset in the financial statements.


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