Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract the evidence a residual interest in the asset of the entity after deducting all of its financial liabilities.
Where the contractual obligations of financial instruments (Including share capital) are equivalent to a similar debt instrument, those financial instruments are classes as financial liabilities. Financial liabilities are presented as such in the balance sheet. Finance costs and gains or losses relating to financial liabilities are included in the profit and loss account. Finance costs are calculated so as to produce a constant rate of return on the outstanding liability.
Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classes as an equity instrument. Any dividends and distributions relating to an equity instrument are debited direct to equity.