Butter Co issues £ 50m 6% preference shares at par on 1/1 / 20X0. The shares...

Butter Co issues £ 50m 6% preference shares at par on 1/1 / 20X0. The shares carry a contractual obligation to be redeemed at a 10% premium in 5 years time. According to IFRS Standards how should the shares be initially recognized in the financial statements on 1/20 / 20X0?

1/ As a financial liability of £ 55m

2/As a financial liability of £ 50m

3/As an equity instrument of £ 55m

4/As an equity instrument of £ 50m

Solutions

Expert Solution

Answer 2] is correct,

As financial Liability of 50m.

Please find the attached sheet for detailed answer and analysis and journal entry.

Comment-

As per IFRS 9, Preference share with compulsory payment of dividend and compulsory redemption, will be treated as financial liability.
These should be recorded at the initial value and it will be adjusted to Internal rate of return each year.
At the time of redemtion, The Payable amount in Financial Liability will be equal to Redemption Value.

Please comment for additional explantion.

ekkarill92 answered 1 year ago

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