MEMO

To: Senior Accountant, Akwa Nig. Limited
From: [Your Name], Financial Reporting Advisor
Date: [Date]
Subject: Treatment of Debt and Equity Instruments under IAS 32

Introduction:
IAS 32 – Financial Instruments: Presentation establishes principles for the classification of financial instruments as liabilities or equity. Below is an analysis of each transaction in line with IAS 32 requirements.

Transaction 1:

Akwa Nig. Limited issued 40 million non-redeemable N1 preference shares at par value. Dividends on these shares are payable only if the company also pays dividends on ordinary shares.

Treatment:
The preference shares meet the definition of an equity instrument under IAS 32 because they are non-redeemable and the payment of dividends is discretionary. The fact that dividends are paid only when ordinary dividends are declared indicates no obligation to pay. Hence, the preference shares should be classified as equity.

Justification:
Since there is no contractual obligation to pay dividends, and the shares are not redeemable, this instrument does not meet the criteria for a financial liability. It falls under equity as per IAS 32.

Transaction 2:

The company entered into an agreement to issue ordinary shares with a value of N5 million as payment for equipment, one year after the delivery.

Treatment:
This transaction represents a financial liability under IAS 32 because Akwa Nig. Limited has a contractual obligation to deliver shares to the supplier. However, the obligation to settle in shares is an equity instrument if the number of shares is fixed, which seems to be the case here.

Justification:
The obligation to issue shares represents a financial liability up until the shares are issued, at which point it becomes an equity transaction. The company should recognize the obligation at fair value in its financial statements as an equity instrument when the equipment is delivered.

Transaction 3:

Directors are required to invest in special N1 ordinary shares, which are repurchased by the company at nominal value upon contract expiration.

Treatment:
This transaction should be treated as a financial liability because the company has an obligation to repurchase the shares at their nominal value when a director’s contract expires. The repurchase obligation means the shares meet the definition of a financial liability under IAS 32.

Justification:
The mandatory repurchase clause creates a financial liability, as the company has no discretion to avoid settling the obligation. Even though the shares are classified as “ordinary,” the repurchase obligation makes them a liability rather than equity.

Conclusion:
Each of these transactions has specific accounting implications based on IAS 32.

• Transaction 1: Preference shares should be classified as equity.
• Transaction 2: The obligation to issue shares is an equity instrument, recognized at fair value upon delivery of the equipment.
• Transaction 3: The directors’ shares should be classified as a financial liability due to the repurchase obligation.

I hope this provides clarity on the classification and treatment of these instruments. Please feel free to reach out if you have any further questions.

Best regards,
[Your Name]
Financial Reporting Advisor