Redeemable preferred shares and equity accounting

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Brains12
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Joined: 02 Apr 2023, 15:45

Redeemable preferred shares and equity accounting

Post by Brains12 »

Hello,

I am struggling with the accounting treatment of the following preferred shares:
- they are mandatorily redeemable in five years; and
- they give voting rights to the holder (~25% of total).

From a preliminary analysis they seem a debt instrument to be accounted for at FVTPL. At the same time, they seem guaranteeing significant influence for the next five years, implying the use of IAS 28.

How should I account for this instrument?

Regards,
Brains12
JRSB
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Re: Redeemable preferred shares and equity accounting

Post by JRSB »

no interest or 'dividends'?
Brains12
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Joined: 02 Apr 2023, 15:45

Re: Redeemable preferred shares and equity accounting

Post by Brains12 »

Dividends are cumulative to be paid at the redemption date or before that, if cash available.
JRSB
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Re: Redeemable preferred shares and equity accounting

Post by JRSB »

Seems to be a liability, no features of equity... (para 16 IAs 32).
cumulative Dividends are fixed coupon?
Plus perhaps you have significant influence over that entity too, so associate?
Brains12
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Joined: 02 Apr 2023, 15:45

Re: Redeemable preferred shares and equity accounting

Post by Brains12 »

Thank you, this is also my view. It seems a liability, because there in an obligation for the issuer to deliver cash at the redemption date. The dividends are fixed coupons and they are at market rate.
From an holder perspective, I will account for it at FVTPL in the balance sheet as a financial asset.

But I still have some doubts: this instrument gives me also voting rights and significant influence over the issuer. Should I account for it in accordance to the equity method or still using the FVTPL because it is a debt instrument?
JRSB
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Re: Redeemable preferred shares and equity accounting

Post by JRSB »

Equity method doesn't mean the instrument is equity. There are two separate issues; one is accounting for the loan, and the other is considering the relationship with that entity from a consolidation perspective.
DJP
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Re: Redeemable preferred shares and equity accounting

Post by DJP »

By the description it looks like this is a debt instrument. You may have voting rights, but you don't seem to be exposed to any variable returns. Why FVTPL though?
Leo
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Re: Redeemable preferred shares and equity accounting

Post by Leo »

Fair value at initial recognition and amortised cost subsequently.
Brains12
Posts: 11
Joined: 02 Apr 2023, 15:45

Re: Redeemable preferred shares and equity accounting

Post by Brains12 »

Thank you all for your help. I think the key is that I am not subject to any variable returns.

I will account for it at fair value at initial recognition and amortised cost after.

Thank you again!
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