The following are a list of distinguished claims against an entity with a short explanation. Some claims take priority over other claims (‘are senior to’), which is also why the liquidation example is used. It also shows different types of equity claims, that also have a hierarchy between themselves regarding their seniority.
Type of claim
The entity has an obligation to transfer an amount of cash, equal to an amount specified in a particular currency, at a specified time before liquidation and senior to all other items.
Shares redeemable for their fair value
The entity has an obligation to settle the claim with cash, at fair value, at a specified time before liquidation or on demand of the holder.
However, like ordinary shares (see below), they do not specify the amount of economic resources and claims that the entity needs to pay – i.e. the fair value of the shares reflects the total of recognised and unrecognised economic resources and other claims.
These claims do not require the entity to settle the claim using economic resources – i.e. the entity uses a variable number of its own ordinary shares of an equal value to the amount specified instead of cash. However, like ordinary bonds, they specify the amount or rate of change in amount that the entity requires to settle the claims.
Cumulative preference shares
These claims are not required to be settled before liquidation of the entity.
However, like ordinary bonds, they specify the amount or rate of change in amount that the entity requires to settle the claims.
The entity has no obligation other than the obligation to transfer at liquidation a share of whatever type, and amount, of economic resources remain under the entity’s control after meeting all other claims.
Claims against an entity with different seniorities Claims against an entity with different seniorities Claims against an entity with different seniorities