Accounting Treatment And Economic Consequences Of Convertible Redeemable Preferred Stocks

With the implementation of the new policy of the Hong Kong Stock Exchange in 2018,the HKEx has attracted more and more mainland enterprises to go public in Hong Kong with its unique advantages.A prospectus for Internet companies listed in Hong Kong listed in Hong Kong found that many companies were listed on the loss,and the main item causing losses in some financial statements was the loss of fair value of convertible redeemable preferred shares.Convertible redeemable preference shares are financial instruments that combine the characteristics of debt and equity instruments.Their accounting treatment will directly affect the solvency indicators and profitability indicators of enterprises,which will affect the realization of corporate financial goals.Therefore,this paper mainly studies the accounting attributes of convertible redeemable preferred stocks,accounting treatment and the economic consequences of different accounting treatments.This paper introduces the process,scale and preferred stock clause design of Xiaomi Company's issue of preferred stock,and analyzes in detail the impact of Xiaomi's preferred stock accounting treatment.The analysis indicates that the convertible redeemable preferred shares issued by Xiaomi Company do not meet the liability definition.The main reason for the company's huge losses is that the company's shareholdings are constantly rising,and the board of directors determines that the redemption rights are not exercised,and the convertible redeemable preference shares are generally recognized as financial liabilities.Under the condition that the company's other financial indicators are good,the profit and loss information thus obtained cannot reflect the economic essence of Xiaomi Company.There is no clear definition of the scope of the composite financial instrument in IFRS,which makes it difficult to determine whether the convertible redeemable preference shares meet the criteria.According to the guidelines,when the financial instrument is judged to be a non-derivative instrument,it should continue to judge whether the financial instrument is a compound financial instrument.When formulating the accounting method of the composite financial instrument,the fair value of the non-equity embedded derivative should be included in the liability.In the fair value of the components,the concepts are nested with each other—the convertible right is essentially equivalent to an option in the economy,but it is part of the equity of the composite financial instrument in the non-derivatives.Although the method of fair value measurement and changes in fair value is included in profit or loss,it can clearly show the change in the value of financial instruments.However,it is recognized as a financial liability only because it cannot avoid the obligation to deliver cash under potentially adverse circumstances.In the case that the right of return will not be exercised,the rise in the fair value of the financial liabilities caused by the rise in the stock price will lead to huge losses for the company.Under US accounting standards,there is a clear line between mandatory redemption and arbitrable redemption.The accounting treatment is different,which is better than international accounting standards in comprehensibility.The accounting treatment of convertible redeemable preference shares under the International Accounting Standards does not conform to the substantive and formal accounting principles,which seriously distort the profit and loss information of the enterprise.In order to eliminate the impact of distorted corporate profit and loss information on investors,companies began to disclose Non-GAAP or Non-IFRS information,but the accounting information that companies voluntarily disclose often lack comparability and cause confusion to users of financial information.At the same time,convertible redeemable preference stocks have caused many companies to lose profits,which may also cause some companies to miss the opportunity to list on China's capital market.In order to solve the above problems,countermeasures are proposed from both the Xiaomi company and the regulatory level.The following suggestions about Xiaomi's company include the following:1According to the improvement of accounting treatment of preferred stocks: The first is to use US GAAP to be classified as mezzanine rights;the second is to designate financial instruments to be measured at fair value and their changes are included.Financial liabilities for profit or loss,but changes in fair value arising from changes in equity valuations are included in other comprehensive income.Third,the convertible redeemable preferred shares are split into financial liabilities and equity instruments.2 For preferred stock investments without active markets,fair value measurement should be used with caution.3 Establish an information disclosure committee to strengthen corporate governance and strengthen supervision of information disclosure.For the government level: 1 Different performance evaluation indicators are adopted in different levels of capital markets.The main board market strictly limits the profit indicators.The GEM market adopts a tiered system and does not strictly limit whether it is profitable.2 In the process of formulating China's accounting standards,accounting standards of other countries and regions should be used reasonably.