Classification
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contact that evidences a residual interest in the assets of the entity after deducting all of its financial liaibilites.
Where the contractual obligations of financial instruments (inclduing share capital) are equivalent to a similar debt isntrument, those financial instrements are classed 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. Dividends and distribtuons relating to equity instruments are debited direct to equity.