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22.1.1 Extract from FRS 102 – Section 22.1-22.2.
22.2 Classification of an instrument as liability or equity.
22.2.1 Extract from FRS 102 – Section 22.3.
22.2.2.1 Definition of financial liability.
22.2.2.2 Definition of equity.
22.2.3 Accounting treatment of instruments classified as debt
22.2.5 Treatment of dividend on instruments classified as equity.
22.2.6 Examples illustrating whether an instrument meets the definition of debt or equity.
22.2.6.1 Redeemable preference shares at option of the holder with mandatory coupon.
22.2.6.2 Non-redeemable preference shares with mandatory coupon at market rate.
22.2.6.4 Shares/loan notes redeemable at the option of the holder
22.2.6.5 Non-redeemable preference shares with discretionary dividend.
22.2.6.6 Redeemable preference shares at option of issuer with discretionary dividend.
22.2.6.7 Redeemable preference shares at option of issuer with mandatory.
22.2.6.9.1 Treatment of difference between present value ad actual amount subscribed for
22.2.6.13 Fixed for fixed arrangement
22.2.6.14 Equity issued in return for a forward contract to issue foreign currency.
22.3.2.2 Contingency element is not genuine.
22.3.2.3 contingency occurring on liquidation.
22.3.2.5 Examples of uncertain future/changed events outside the control of the issuer
22.3.2.6 Example of instruments to be classified as a debt or equity.
22.4 Original issue of shares or other equity instruments.
22.4.1 Extract from FRS 102 – Section 22.7-22.10.
22.4.2 OmniPro comment – Accounting treatment
22.4.2.4 Examples of share issues – accounting treatment
22.5 Exercise of options, rights and warrants.
22.5.1 Extract from FRS 102 – Section 22.11.
22.6 Capitalisation or bonus issues of shares and share splits.
22.6.1 Extract from FRS 102 – Section 22.12.
22.7.1 Extract from FRS 102 – Section 22.13-22.15.
22.7.2.1 Determining the split of debt and equity.
22.7.2.2 Treatment of transaction cost
22.7.2.3 Subsequent revisions.
22.7.2.4 Accounting for the liability.
22.7.2.5 Examples of compound financial instruments.
22.7.2.6 Compound Financial instrument example.
22.7.2.7 Accounting for the convertible option once exercised or option to exercise is not taken.
22.7.2.8 Allocation of transaction costs.
22.8.1 Extract from FRS 102 – Section 22.17-22.18.
22.8.2.1 Distribution of shares classified in equity.
22.8.2.2 Distributions on shares classified as debt (i.e. On shares classified on debt)
22.8.2.3 Disclosure of fair value of non-cash distributions.
22.9 Non-controlling interest and transactions in shares of a consolidated subsidiary.
22.9.1 Extract from FRS 102 – Section 22.19.
22.9.2.2 Accounting for acquiring a further controlling interest
22.9.2.3 Accounting for disposals of controlling interests but controlling interest retained.
22.10.1.1 Statement of changes in equity.
22.10.1.2 Accounting Policies.
22.10.1.3 Note to the financial statements.
22.10.1.4 Notes in relation to dividends
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The below extracts and guidance is applicable for periods beginning before 1 January 2019 and are based on the September 2015 version of FRS 102. For periods beginning on or after 1 January 2019, the March 2018 version of FRS 102 applies which incorporates the changes made by the Triennial review of FRS 102. Note the March 2018 version of FRS 102 can be voluntarily applies for periods beginning before 1 January 2019. For the extracts from the March 2018 version of FRS 102 and the related guidance please click on the following link. For details of a summary of the main changes as a result of the triennial review please see the following link.
22.4 Original issue of shares or other equity instruments
22.4.1 Extract from FRS 102 – Section 22.7-22.10
22.7 An entity shall recognise the issue of shares or other equity instruments as equity when it issues those instruments and another party is obliged to provide cash or other resources to the entity in exchange for the instruments.
(b) If the entity receives the cash or other resources before the equity instruments are issued, and the entity cannot be required to repay the cash or other resources received, the entity shall recognise the corresponding increase in equity to the extent of consideration received.
(c) To the extent that the equity instruments have been subscribed for but not issued (or called up), and the entity has not yet received the cash or other resources, the entity shall not recognise an increase in equity.
22.8 An entity shall measure the equity instruments at the fair value of the cash or other resources received or receivable, net of direct costs of issuing the equity instruments. If payment is deferred and the time value of money is material, the initial measurement shall be on a present value basis.
22.9 An entity shall account for the transaction costs of an equity transaction as a deduction from equity, net of any related income tax benefit.
22.10 How the increase in equity arising on the issue of shares or other equity instruments is presented in the statement of financial position is determined by applicable laws. For example, the par value (or other nominal value) of shares and the amount paid in excess of par value may be presented separately.
22.4.2 OmniPro comment – Accounting treatment
22.4.2.1 Overview
Section 22.7 to 22.10 of FRS 102 makes it clear that an entity must measure equity instruments at their fair value (whether this be received in cash or non-cash form). Where payment is deferred on initial recognition the amount must be present valued, if material, net of transaction cost (after any tax deductions) If the equity is unpaid it is recognised at the date of issuance with a corresponding journal to debtors.
22.4.2.2 Transaction cost
Section 22.9 of FRS 102 makes it clear that any transaction costs incurred on issuance should be deducted against the issue proceeds not of any tax benefit. See example at 22.4.2.
22.4.2.3 Presentation
Section 22.10 of FRS 102 gives a choice as to how to present the amount issued for shares in the balance sheet. However, company law has specific rules in this respect and needs to be considered. NOTE from a company law perspective, whether shares are classified as a liability or equity is irrelevant, these are still seen as share capital and the capital maintenance rules apply.
22.4.2.4 Examples of share issues – accounting treatment
See the example below for illustration of the guidance sections 22.7 to 22.10 of FRS 102:
Example 14: Accounting treatment on original issue of shares
Company A issued 100,000 ordinary shares of CU1 each for CU200,000 (i.e. at a premium of CU1). The professional fees incurred on the issue of these shares was CU20,000 and the tax rate is 10%. In this instance the holder paid for the shares to be issued and the company then issued the holder with a share certificate. The journals required under the standard detailed above and as required by Company law are:
| CU | CU | |
| Dr Bank | 200,000 | |
| Cr Ordinary Share Capital | 100,000 | |
| Cr Share Premium | 100,000 |
Being journal to recognise the receipt of cash for the shares and the issuance of share capital at a premium
| CU | CU | |
| Dr Ordinary Share Capital/Share Premium | 20,000 | |
| Cr Bank/Trade Creditors | 20,000 |
Being journal required to reflect directly attributable costs of issue
| CU | CU | |
| Dr Corporation Tax in P&L | 2,000 | |
|
Cr Ordinary Share Capital/Share Premium (CU20,000 * 10%) |
2,000 |
Being journal to reflect tax deduction available on issuance of shares assuming tax is originally charged to the P&L.
Therefore the net amount shown in share capital and share premium is CU182,000 (CU200,000-CU20,000+CU2,000).
Example 15: Accounting treatment on original issue of shares – left as unpaid
If we take example 14 above and assume that the individual did not pay for the share capital initially but the shares were allotted. The company would recognise a receivable for the unpaid share capital. Let us also assume that the company gives the holder 2 years to pay. Assuming the time value of money is material, although the Section does not say how the present value rate should be determined, the best rate to use would be the rate a bank/external party would charge for such a loan. If we assume a market rate is 8%. The present value of CU200,000 at a discount rate of 8% in two years time is CU171,468 (i.e. CU200,000/(1.08^2)). In this case journal 1 in example 14 would be replaced with:
| CU | CU | |
| Dr Other Debtors | 171,468 | |
| Cr Ordinary Share Capital (CU100,000/(1.08^2)) | 85,734 | |
| Cr Share Premium (CU100,000/(1.08^2)) | 85,734 |
Being journal to recognise the receipt of cash for the shares and the issuance of share capital at a premium
Then the interest of 8% will be released over the two year period to interest cost in the profit and loss. The journal required at the end of year 1 would be:
| CU | CU | |
|
Dr Interest Cost P&L (CU171,468*8%) |
13,712 | |
| Cr Other Debtors | 13,712 |
Being journal required to build the other debtor balance up to CU200,000 by the end of the 2 year period. The interest charge for year 2 would be CU14,815 (i.e. CU171,468*1.08=CU185,184*8%)
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Examples
Example 1: Redeemable preference shares at option of the holder with mandatory coupon.
Example 2: Non-redeemable preference shares with mandatory coupon at market rate.
Example 4: Shares redeemable at the option of the holder
Example 5: Non-redeemable preference shares with discretionary dividend.
Example 6: Redeemable preference shares at option of issuer with discretionary dividend.
Example 7: Redeemable preference shares at option of issuer with mandatory dividend.
Example 13: Fixed for fixed arrangement
Example 13A: Application of Section 22.3(b)(ii) of FRS 102.
Example 13B: Future contingency amount
Example 13C: Future contingency.
Example 14: Accounting treatment on original issue of shares.
Example 15: Accounting treatment on original issue of shares – left as unpaid.
Example 16: Capitalisation/bonus issue.
Example 17: Accounting treatment for a compound financial instrument
Example 18: compound instrument where conversion is chosen.
Example 19: compound instrument where conversion is chosen.
Example 20: Accounting for transaction costs in acquiring a compound financial instrument
Example 21: Acquiring a further controlling interest
Example 22: Acquiring a further controlling interest
Example 23: Disposing of controlling interest but controlling interest retained.
Example 24: Extract of Statement of Changes in Equity from financial statements.
Example 25: Extract from accounting policies note.
Example 26: Extract from notes to the financial statements – liability
Example 27: Extract from notes to the financial statements – share capital
Example 28: Extract from notes to the financial statements – dividends on equity shares.
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