Research On The Accounting For Convertible Redeemable Preferred Stock

The distinction between debt and equity of financial tools has been an long-existing international problem,convertible redeemable preference shares is the appropriate financial instruments for the combination of venture enterprises and risk investment,the diversity of its terms makes its accounting treatment even more complex.After MT company listed in Hong Kong,it reported a loss of 6.26 billion yuan at the end of 2016,5.6 billion yuan losses was caused by convertible redeemable preferred stock changes in the fair value.Our country enterprise accounting standards has achieved substantial convergence with international accounting standards,doubts about the effects on the accounting treatment will to a certain extent hinder the convertible redeemable preferred stock application in the field of venture capital in our country.This article think through the rules of United States Generally Accepted Accounting Principles and the international accounting standards concerning distinguishing the financial liabilities and equity instruments in detail,using the method of literature research,comparative study to analyze the terms and conditions that need to comprehensively consider when accounting preferred stocks,summarizes accounting confirmation method of preferred shares under the international accounting standards,concludes the differences between the two sets of accounting standards concerning the convertible redeemable preference shares' accounting.In the end,take the preferred shares issued by MT company as an example,this paper elaborate the adverse effect of MT company's accounting toward convertible redeemable preferred stock,points out the difficulties applying the international accounting standards,put forward modification suggestions to the accounting of convertible redeemable preference shares.In this paper,research has shown that MT company confirm convertible redeemable preference shares overall as a financial liability the changes of which in fair value will becalculated in profit or loss does not conform to the definition of liability,and the accounting treatment would appear huge losses in the situation where equity valuation rising continually and the board of directors decided that the redeem clause won't be exercise duo to the confirmation of financial liabilities,causing difficulties for the financial report users to understand.The scope of the international accounting standards for complex financial instruments and hybrid instruments is unclear,making it difficult for convertible redeemable preferred shares to apply the rules.Criterion shows that when a financial instrument is not confirmed as a derivation,we should continue to determine whether the financial instrument conform to complex financial instruments,but the illustration of the complex financial instruments accounting method shows that the fair value of the non-equity embedded derivatives should be included in the fair value of the liability component,concepts nested with each other.The convertible right is essentially an option,but it belongs to the equity part of the complex financial instrument in the non-derivative instrument.Although the fair value calculated in the profit and loss method can clearly show the change of the value of financial instruments,but just because of the issuer can't avoid delivery cash obligations in potential adverse circumstances,huge losses is measured under the confirmation of financial liabilities even in a situation where the valuation of the company's shares rising continually,the board decided that foreclosures will not be exercised.Under the American accounting standards,there are clear boundaries between compulsory redemption and redeemable rights,which is much more understandable than that of international accounting standards.This paper proposes suggestions for the accounting of convertible redeemable preferred stock from three angles.First is the application of the US GAAP,under US GAAP,since the redeemable term is contingent,after estimate the redeemable feature do not need to break up,the preferred stock meets the condition to divided into temporary rights,it should be recorded initially at fair value,then adjusted to the highest redemption amount at each balance sheet date.Second,modify the method that once designated to financial liability its change in fair value should be included in the profits and losses,based on the similar logic of the fair value change derive from credit risk,the accounting mistake can be fixed when the fair value change caused by equity valuation should be adjusted to the other synthetic returns rather than included in profit and loss.Finally,if do not use the fair value method,the convertible redeemable preferred stock is applicable to the accounting method of composite financial instruments.