Research On Accounting Recognition Of China's Preferred Stocks

Preferred stock entered into Chinese capital market with the in-depth development of financial system reform in China in recent years.The contractual attributes of preferred stock make it more flexible and adaptable to finance preferred stock than simple bonds and ordinary shares.However,in terms of accounting recognition,the above advantages have a negative impact that makes accounting recognition more complicated.Different accounting recognition results could lead to a completely different financial reports to the preferred stock issuer,and further include the quality of accounting information.The aim of this thesis is to analyse the accounting recognition of preferred stock by combining accounting theories and relevant regulations with preferred stock contract terms.The preferred stock that is referred to in this paper is a financial instrument in accounting concept,not a legally defined equity securities.Accounting recognition of preferred stock involves two aspects: the distinction between financial liabilities and equity instruments,and the bifurcation of hybrid contracts.Based on the conceptual framework of financial reporting,this thesis begins with the analysis of the definition of liability and owner's equity,clarifying liability as a current obligation,and distinguishing them by applying strict obligation approach in consistent with the definition of liability in the framework.This is followed by comparing the approaches of distinguishing financial liabilities and equity instruments adopted by US Generally Accepted Accounting Principle(US GAAP)and International Financial Reporting Standards(IFRS).It is believed that the emphasis on the inevitable current obligation in IFRS is more in line with the definition of liability,and as a principle-oriented standard,IFRS is more suitable to be applied to new financial instruments.Therefore,a frame diagram is produced based on IFRS.Besides,after analysing the accounting treatment of hybrid contracts in IFRS and compound instruments and the process of bifurcation,it is concluded that when a financial instrument meets the definition of both compound instrument and hybrid contracts,the compound instrument rules should be applied first.This is followed by the application of hybrid contract rules to determine if further bifurcation is needed.At this point,a flow chart of accounting recognition for financial instrument is prepared by combining the analysis above,which forms a foundation at a standard level.In regards to the practice of preferred stock,this thesis starts with a descriptive analysis of existing preferred stock at Chinese market macroscopically,recognising the core terms that affect accounting recognition,and integrating those terms into the accounting recognition flowchart of financial instrument to produce a flowchart for preferred stock.A variety of complex contract terms are grouped to corresponding recognition results.Agricultural Bank of China and Ninebot are chosen as examples for comparison,with the former being the first preferred stock categorised as equity instrument in China,which is groundbreaking and universal,and the latter being prospective because it is a convertible and redeemable preferred stock that was recognised as financial liability,and rare in market as a common finance option for technological innovation enterprises.On the basis of analysis above,it is concluded that accounting recognition of preferred stock is a recognition of financial instrument.The flexible combination of contract terms links the recognition with the distinction between financial liabilities and equity instrument,and hybrid contract bifurcation.As inevitable current obligation,liability should be recognised first in the distinction.In preferred stock contracts,terms regarding to interest,investor buy-back,residual profit distribution and stock transfer are core terms.Various term combinations lead to different recognition results.Recommendations based on the above conclusions are also given in this thesis.Firstly,the definition of liability in conceptual framework of financial reporting should be extended to the level to include financial liability,while the current situation is the reverse.Appropriate restrictions should be applied to fair-value option in hybrid contracts to prevent abuse.Additionally,for some convertible and redeemable preferred stocks that are assigned as fair-value measurement,movement in fair-value should be counted as other comprehensive income instead of the current profit and loss,in order to eliminate the ‘antiinstinct' effect.Furthermore,disclosure and presentation could be used to enhance information sharing,and therefore,reduce the stress to distinguish liability and owner's equity.This paper is focused on the analysis of financial instrument accounting standards normalisation.Based on the study of distinction between financial liability and equity instrument,and bifurcation of hybrid contract,the complicated procedure of financial instrument accounting recognition is analysed,with a reference value to the continuously developing financial instrument market.Meanwhile,a flow chart for preferred stock accounting recognition is produced by considering the practice in Chinese market and relevant core terms in preferred stock contract.It is believed that this flow chart could contribute to the accounting recognition of preferred stock,when various terms are used in contracts.