The Research On Accounting Treatment And Economic Consequences Of Preferred Stock

As a way of financing,preferred stock can compensate for the shortcomings of common stock to a certain extent and is widely used in the field of venture capital.Although preferred stock financing has its advantages,as a kind of hybrid securities,preferred stock is quite difficult in accounting recognition and measurement.The discussion about the division of liability and equity by Accounting Standards Institutions has been ongoing.Currently,the two most influential accounting standards around the world,International Financial Reporting Standards(IFRS)and United States Generally Accepted Accounting Principles(US GAAP)are different in the division of financial liabilities and equity instruments,which creates differences in the accounting recognition and measurement of preferred stock.In the era of Internet,many highquality start-ups in China Mainland have chosen to list on the Hong Kong Stock Market in order to obtain more financial support.According to the publicly disclosed information of these companies,many of them obtained the venture capital at the cost of issuing preferred shares before listing,and the accounting treatment of these preferred shares caused huge losses,which had a significant impact on their financial statements.This kind of treatment is in compliance with the accounting standards and has been approved by the external auditors,but it has put a veil on the financial statements of the company.After in-depth study of relevant theoretical literature and accounting standards,this thesis elaborates the concepts and methods of the division of financial liabilities and equity instruments under International Accounting Standards and United States Generally Accepted Accounting Principles.Based on the International Accounting Standards and China Accounting Standards,this thesis analyses the contract terms of preferred stock in the view of accounting and summarizes the general idea of accounting treatment of preferred stock.The Xiaomi Corporation was selected as a case to study the accounting treatment of redeemable convertible preferred stock(RCPS).In the part of case analysis,I analyze the basis and direct impact of accounting treatment of RCPS firstly.Then I analyze the economic consequences of the holder's conversion of preferred shares into common shares from three aspects: control right,financial status and market performance.Considering the direct impact and economic consequences,I propose three ways to improve the accounting treatment of the preferred stock: the change of fair value is included in other comprehensive income,using the concept of mezzanine equity,and the value of the liability and equity component are separately recognized.By comparison,the first method is the most practical and lowest-cost method based on this case,the second method,which refers to the US GAAP,is better in terms of consequences and comprehensibility,and the third method is still in compliance with IFRS,but it is not easy to use in real situation.In the last part of this thesis,relevant suggestions are also made from the four aspects: accounting standards,information disclosure,investors,and the company itself.