Reference no: EM133000723

Ratcliffe is a listed company seeking to grow. In order to fund this expansion, Ratcliffe is looking to raise new long-term finance, but is concerned about breaching its existing loan covenants, which are based on gearing and interest cover.
The following exhibit provides information relevant to the questions.

Financial instruments

The directors of Ratcliffe are proposing to issue the following preference shares:

(i) 'A' class: 40 million irredeemable $1 preference shares at par value. Under the terms attaching to the preference shares, a dividend will be payable on the preference shares only if Ratcliffe also pays a dividend on its ordinary shares relating to the same period.
(ii) 'B' class: 10 million $1 redeemable preference shares at par value. These shares give the holder the right to a fixed cumulative cash dividend of 5% per annum of the issue price of each preferred share. The preference shares can be redeemed, but only at the option of Ratcliffe Co, at an unspecified future date.

Required

Problem 1: Explain to the directors how the financial instruments they propose to issue should be classified and presented in the financial statements of Ratcliffe under IAS 32 Financial Instruments: Presentation and explain the effect of issuing the financial instruments on gearing and interest cover.
Note: you do not need to discuss the measurement of the financial instruments in your answer.