Cumulative nature of the returns on the predilection shares, Financial Accounting

A changeable instrument is deemed part liability and part equity. IAS 32 necessitate that each part is measured individually on initial recognition. The liability element is measured by estimating the present value of the future cash flows from the instrument (interest and potential redemption) using a discount rate equal to the market rate of interest for a similar instrument with no conversion terms. The equity element is subsequently the balance, calculated as follows: $

PV of the principal amount $10m at 7% redeemable in 5 yrs

$10m x 0.713

7,130,000

PV of the interest annuity at 7% for 5 yrs

(5% x $10m) x 4.100

2,050,000

Total value of liability element

9,180,000

Equity element (balancing figure)

820,000

Total proceeds raised

10,000,000

The equity will not be remeasured, however the liability element will be subsequently remeasured at amortised cost using the effective interest rate of 7%. The total finance cost for the year ended 31 December 2010 is $642,600 (7% x 9,180,000). The coupon rate of interest of 5% has already been charged to profit or loss in the year so a further $142,600 should be recorded:

Dr Finance costs $142,600

Cr Non-current liability $142,600

(b) Preference shares

The substance of the instrument is a debt instrument. IAS 32 requires that any instrument that contains an obligation to transfer economic benefit be classified as a liability. The cumulative nature of the returns on the predilection shares means that the outflow of benefit is inevitable. The predilection shares would then be classified as debt and would in fact increase the gearing of the entity.

Posted Date: 5/29/2013 4:08:55 AM | Location : United States







Related Discussions:- Cumulative nature of the returns on the predilection shares, Assignment Help, Ask Question on Cumulative nature of the returns on the predilection shares, Get Answer, Expert's Help, Cumulative nature of the returns on the predilection shares Discussions

Write discussion on Cumulative nature of the returns on the predilection shares
Your posts are moderated
Related Questions
I have a presentation on an article (around 20 pages). I also need 2 current real life examples (2 companies) to support the presentation. Can you do that? How long it will take yo

BALANCE SHEET Grouping of items:   Items in the Balance Sheet should be grouped under appropriate headings. In particular, a trust operating the provisions of the Trustee Act

Q. Principles of banking and finance? An introduction to the principles of banking and finance. It covers a broad variety of topics using an economic perspective and aims to gi

Statement to ascertain profit in analysis method and comparison method, and reconstructed using ledger

What kinds of risks does a firm like Amazon.com face with respect to safeguarding its assets? What types of controls do you think it already has in place to minimize these risks? G

AMALGAMATIONS Two sole traders and a partnership,two or more partnerships or a sole trader and other partnerships may combine or join together to forma a single partnership. The

1.From the following information you are required to prepare a cash Flow statement of XYZ Ltd for the year ended 31 st December 2009 LIABILITIES

50. In preparing a company's statement of cash flows for the most recent year on the indirect method, the following information is available: 52,000-Net income for the year 18,00

Seattle Health Plans currently uses zero debt financing.  Its operating income (EBIT) $1 million, and it pays taxes at a 40 percent rate.  It has $5 million in assests and because

Consider a worker who earns $8.00 per hour and has no other source of income.  Compare the following two transfer policies: i.  A negative income tax that sets the tax (per day)