Which of the following is an example of an adverse effect of financial liabilities?
A) Periodic payments on the financial instruments, such as dividends, may be recognised as a borrowing cost and therefore reduce the entity's profits.
B) A financial institution breaching regulations imposed on it to maintain a minimum level of capital.
C) An entity breaching their obligations under a debt covenant relating to its solvency.
D) All of the above options.

Question

Quizplus · Accepted Answer

A) Periodic payments on financial instruments can reduce the profits of the entity as they are recognized as borrowing costs. 
B) If a financial institution breaches regulations on capital maintenance, it can face regulatory and legal action, which can damage their reputation and cause financial losses. 
C) Breaching obligations under a debt covenant related to solvency can cause the entity to default on the debt, leading to potential bankruptcy and financial losses. Therefore, all options listed (A, B, C) are examples of adverse effects of financial liabilities.

Which of the Following Is an Example of an Adverse