(c) Ethan’s classification of the B shares as equity instruments does not comply with HKAS 32 Financial Instruments:
Presentation. HKAS 32 paragraph 11, defines a financial liability to include, amongst others, any liability that includes a
17contractual obligation to deliver cash or financial assets to another entity. The criteria for classification of a financial instrument
as equity rather than liability are provided in HKAS 32 paragraph 16. This states that the instrument is an equity instrument
rather than a financial liability if, and only if, the instrument does not include a contractual obligation either to deliver cash
or another financial asset to the entity or to exchange financial assets or liabilities with another entity under conditions that
are potentially unfavourable to Ethan. HKAS 32 paragraph AG29 explains that when classifying a financial instrument in
consolidated financial statements, an entity should consider all the terms and conditions agreed between members of a group
and holders of the instrument, in determining whether the group as a whole has an obligation to deliver cash or another
financial instrument in respect of the instrument or to settle it in a manner that results in classification as a liability. Therefore,
since the operating subsidiary is obliged to pay an annual cumulative dividend on the B shares and does not have discretion
over the distribution of such dividend, the shares held by Ethan’s external shareholders should be classified as a financial
liability in Ethan’s consolidated financial statements and not non-controlling interest. The shares being held by Ethan will be
eliminated on consolidation as intercompany.
4 (a) (i) The existing guidance requires a provision to be recognised when: (a) it is probable that an obligation exists; (b) it is
probable that an outflow of resources will be required to settle that obligation; and (c) the obligation can be measured
reliably. The amount recognised as a provision should be the best estimate of the expenditure required to settle the
present obligation at the balance sheet date, that is, the amount that an entity would rationally pay to settle the obligation
at the balance sheet date or to transfer it to a third party. This guidance, when applied consistently, provides useful,
predictive information about non-financial liabilities and the expected future cash flows, and is consistent with the
recognition criteria in the Framework. Standard setters have initiated a project to replace HKAS 37 for three main
reasons:
1. To address inconsistencies with other HKFRSs. HKAS 37 requires an entity to record an obligation as a liability
only if it is probable (i.e. more than 50% likely) that the obligation will result in an outflow of cash or other
resources from the entity. Other standards, such as HKFRS 3 Business Combinations and HKFRS 9 Financial
Instruments, do not apply this ‘probability of outflows’ criterion to liabilities.
2. To achieve global convergence of accounting standards. The IASB is seeking to eliminate differences between IFRSs
and US generally accepted accounting principles (US GAAP). At present, IFRSs and US GAAP differ in how they
treat the costs of restructuring a business.
