Hi,
When a holder subscribe for preference shares, does it matter first to determine if its preparing its consolidated FS or separate FS under IAS 27?
If it's preparing its separate FS under IAS 27, my question is how the requirement of IFRS 9 comes into play with IAS 27?
More specifically, under IAS 27, an entity should recognise its investment:
at cost;
in accordance with IFRS 9;
or equity method.
a) should a company determine the criteria above first, then, only if it elects to apply IFRS 9, then, it assesses whether it's an equity instrument or a debt, and if it's debt, then, applying the SPPI tests to determine whether account it at FVTPL, or at amortised cost.
Or
b) should a company determine whether it's an equity instrument or a debt instruments, then, if it's equity instruments, the preference shares should be recognised in accordance with the IAS 27 requirements:
at cost;
in accordance with IFRS 9;
or equity method.
And if it's a debt instrument, then, its a receivable?
Considering a) and b), overall, the questions is should a company look at IAS 27.10 first, then, if and only if company elects to account the sub under IFRS 9, that all the requirements under IFRS 9 applies, or should the company looks at IFRS 9 first, and only if it's an equity instruments that the company can account for the investment in accordance with IAS 27.10?
Put it differently, my question is, under conso, financial assets (including the prefs) are treated as receivables (unless IAS 28 applies). So the classification decision tree under IFRS 9 is clearly applicable. However, under IAS 27, there is a question of whether to treat the prefs as investment in subs or a receivable? so whether the IFRS 9 classification decision tree should be applied and at which step?
By IFRS 9 decision tree, I mean: Debt: SPPI pass or fail, Business model (Hold to collect or not); Equity: Held for trading or not...
Thanks
Accounting of preference shares from the holder's perspective
Accounting of preference shares from the holder's perspective
Last edited by Leo on 08 Mar 2024, 12:17, edited 1 time in total.
Re: Accounting of preference shares from the holder's perspective
My thoughts are as follows, and it applies to IAS 27, not conso FS:
I think one should first assess whether it's equity or debt, If the prefs are equity instruments under IAS 32 (by the issuer), e.g., non redeemable prefs. then it should be recorded as investment in subs with the options to account them, at cost, at fair value or equity method.
If it's a debt instrument, then, its a receivable and can be held at amortised cost, FVOCI or FVTPL?
The thing with the prefs is that, if it's non-redeemable shares or at the issuer's discretion, so the issuer may never redeem the shares, and the prefs may never be converted into ordinary shares. Prefs often do not have voting rights, so it's similar to a perpetual debt... But let's not get into this, because IAS 32 clearly says that non redeemable prefs share equity.
I think one should first assess whether it's equity or debt, If the prefs are equity instruments under IAS 32 (by the issuer), e.g., non redeemable prefs. then it should be recorded as investment in subs with the options to account them, at cost, at fair value or equity method.
If it's a debt instrument, then, its a receivable and can be held at amortised cost, FVOCI or FVTPL?
The thing with the prefs is that, if it's non-redeemable shares or at the issuer's discretion, so the issuer may never redeem the shares, and the prefs may never be converted into ordinary shares. Prefs often do not have voting rights, so it's similar to a perpetual debt... But let's not get into this, because IAS 32 clearly says that non redeemable prefs share equity.
Last edited by Leo on 08 Mar 2024, 12:29, edited 1 time in total.
Re: Accounting of preference shares from the holder's perspective
So as per the above post, there seems to be an argument to account the equity instrument as an investment in subsidiary.
Still here, there seems to be two questions which is:
1. if the holder has zero% control over the issuer, but the prefs, if converted, could potentially give them control.
2. If the holder has zero% control over the issuer, but the prefs, if converted, could potentially give them control over 5% let's say of the shares.
However, I think even if the holder does not have any control over the issuer yet, can still account for the prefs as investment in subs. I don't think the prerequisite of recognising a sub at cost (for example) is conditioned by the percentage of control.
So, if the above are all valid, then, the difference of a company doing conso and and company preparing IAS 27 accounts, is that if it's equity instrument, under IAS 27, the company can recognised the prefs as an investment in subs.
However, if you apply this logic, why the prefs, classified as debt cannot be considered as investment in subs if the holder is sure to exercise them?
Conversely, since all this is still conditional, why the prefs should not all be recognised as receivables under IAS 27 accounts?
It doesn't seem to have any clear guidance on the prefs under IAS 27, so I think it's very judgemental, and one may argue for and against. And all are acceptable.
Still here, there seems to be two questions which is:
1. if the holder has zero% control over the issuer, but the prefs, if converted, could potentially give them control.
2. If the holder has zero% control over the issuer, but the prefs, if converted, could potentially give them control over 5% let's say of the shares.
However, I think even if the holder does not have any control over the issuer yet, can still account for the prefs as investment in subs. I don't think the prerequisite of recognising a sub at cost (for example) is conditioned by the percentage of control.
So, if the above are all valid, then, the difference of a company doing conso and and company preparing IAS 27 accounts, is that if it's equity instrument, under IAS 27, the company can recognised the prefs as an investment in subs.
However, if you apply this logic, why the prefs, classified as debt cannot be considered as investment in subs if the holder is sure to exercise them?
Conversely, since all this is still conditional, why the prefs should not all be recognised as receivables under IAS 27 accounts?
It doesn't seem to have any clear guidance on the prefs under IAS 27, so I think it's very judgemental, and one may argue for and against. And all are acceptable.
Re: Accounting of preference shares from the holder's perspective
What I have mentioned earlier, about the accounting in conso was not exactly accurate, because Investment in equity shares is presented as financial assets, current and non-current. And if it's between a parent and a sub, it would be eliminated in conso and not shown in the statements. If it's a associate, it would be recorded as per IAS 28. So there is no question of whether presenting it as an investment in subs or a financial asset (or receivable). It should only be treated as a financial asset in accordane with IFRS 9.
In the separate FS, the accounting of an investment should first be identified as whether the investment is an investee, an associate/joint arrangement or a subsidiary.
-If it's an investee (which means neither sub nor associate, for example, 10%) than, the only option is to account for the equity investment in accordance with IFRS 9. I think in such a case, the presentation would be to "Financial asset" category in the separate FS.
-If it's an associate, then, equity method may be applied.
-Only if it's an investment in sub, then, the entity has the choice to account for the investment in the sub at cost, FV (under IFRS 9) or equity method.
Now, that being said, I think the real key question number 1 in this post is:
If it's an investment in the preference shares of another entity, as I said before, there is no question under conso (for reasons exposed above). However, in the separate FS, whether considerations should be given to the "potential voting rights upon conversion" or not?
Let's say that if it's an investee (which means neither sub nor associate, for example, 10%), however, the prefs if exercised, could potentially give the entity control (becomes a sub). So in that case, whether the prefs should still be accounted at fair value as a financial asset under IFRS 9 or could the whole investment be "switched" to Investment in subs at cost (if company makes this election).
I think the real key question number 2 is:
Conversely to the question 1, if the investment is already a sub accounted at cost, whether the prefs, even it's not classified as an equity instrument under IAS 32, so debt instrument, can be accounted at cost along with the investment in sub, or should be presented as a financial asset under IFRS 9 in a separate line?
In the separate FS, the accounting of an investment should first be identified as whether the investment is an investee, an associate/joint arrangement or a subsidiary.
-If it's an investee (which means neither sub nor associate, for example, 10%) than, the only option is to account for the equity investment in accordance with IFRS 9. I think in such a case, the presentation would be to "Financial asset" category in the separate FS.
-If it's an associate, then, equity method may be applied.
-Only if it's an investment in sub, then, the entity has the choice to account for the investment in the sub at cost, FV (under IFRS 9) or equity method.
Now, that being said, I think the real key question number 1 in this post is:
If it's an investment in the preference shares of another entity, as I said before, there is no question under conso (for reasons exposed above). However, in the separate FS, whether considerations should be given to the "potential voting rights upon conversion" or not?
Let's say that if it's an investee (which means neither sub nor associate, for example, 10%), however, the prefs if exercised, could potentially give the entity control (becomes a sub). So in that case, whether the prefs should still be accounted at fair value as a financial asset under IFRS 9 or could the whole investment be "switched" to Investment in subs at cost (if company makes this election).
I think the real key question number 2 is:
Conversely to the question 1, if the investment is already a sub accounted at cost, whether the prefs, even it's not classified as an equity instrument under IAS 32, so debt instrument, can be accounted at cost along with the investment in sub, or should be presented as a financial asset under IFRS 9 in a separate line?