Hi,
There is something that I don't understand in terms of redemption of pref shares and its requirement to have sufficient distributable reserves in the UK.
Let's say that a company has zero distributable profit on day 1. The company issues 5m of pref shares mandatorily redeemable in 5 years.
The 5m is classified in liability.
At redemption, the entries are:
Dr: liability
Cr: Cash
However, in the uK, there are capital maintenance considerations, which results into:
Dr Retained earnings (distributable reserves)
Cr Capital redemption reserve
Cr Share premium
So, if the company hasn't realised any profit, the redemption will result into a negative distributable reserves of 5m, thus, making this operation unlawful?
Could someone shed some light on this please!
Redemption of Preference shares & Distributable reserves
Re: Redemption of Preference shares & Distributable reserves
If the shares are treated as liabilities, why does a capital redemption reserve and impact on retained earnings arise when repaid?
Re: Redemption of Preference shares & Distributable reserves
Please see tech 02 17
Re: Redemption of Preference shares & Distributable reserves
That's a 173 page document about distributable reserves... I mean why would an instrument which is a liability impact retained earnings?
Re: Redemption of Preference shares & Distributable reserves
Have you seen the section about capital maintenance requirements?
Re: Redemption of Preference shares & Distributable reserves
Yes I'm familiar with it but I don't understand the starting point of how your liability interacts with retained earnings or why it has anything to do with a capital redemption. However, I think we're miles apart!
Re: Redemption of Preference shares & Distributable reserves
there is an accounting entry Re.
Dr: Retained earnings
Cr: Capital redemption reserves
Cr: Share premium
Dr: Retained earnings
Cr: Capital redemption reserves
Cr: Share premium
Re: Redemption of Preference shares & Distributable reserves
ok well perhaps before you even get to that point you have to default on the interest since the preference share dividend (accounted as interest) requires distributable reserves too
Re: Redemption of Preference shares & Distributable reserves
In which case maybe there's no solution other than to be careful before issuing that kind of instrument?