In differentiating between a financial liability and equity,the report preparer must consider:
A) the existence of a contractual obligation to deliver cash or another financial asset.
B) the consequences of recording a financial liability and the associated impacts on profit.
C) the substance of the agreement over its form.
D) the existence of a contractual obligation to deliver cash or another financial asset and the substance of the agreement over its form.

Question

Quizplus · Accepted Answer

To differentiate between a financial liability and equity, the report preparer must consider both the existence of a contractual obligation to deliver cash or another financial asset and the substance of the agreement over its form. While the consequences of recording a financial liability and the associated impacts on profit (B) are important considerations, they are not sufficient on their own in determining whether an item should be classified as a liability or equity. Similarly, the existence of a contractual obligation to deliver cash or another financial asset (A) is an important consideration, but not the only factor to be considered. Therefore, option D is the best choice as it considers both key factors that must be considered in differentiating between a financial liability and equity.

In Differentiating Between a Financial Liability and Equity,the Report Preparer