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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 2 years ago
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