Baker Company issued P8M, 5-year bonds with a stated interest of 11% payable annually.

Each P1 000 bond is convertible into 10 ordinary

shares that have a par value of P5. The bonds were issued to yield an
interest of 10%, but Bakers bonds would sell at 9% only without the conversion option. At maturity, only 50% of the bonds were converted

into ordinary shares which were trading at P50.

Preference Shares
Preference Shares
special class of shares that possess certain preferences or features not

possessed by ordinary shares.

Features Associated with Preference Shares

Preference as to dividends Preference as to assets in the event of liquidation Convertible into ordinary shares Callable at the option of the corporation

Non-voting

Preference Shares
Features of Preference Shares
Cumulative: if a company fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to ordinary shareholders Participating: share ratably with the ordinary shareholders in any profit distribution beyond a prescribed rate Convertible: preference shareholders may, at their option, exchange their

preference shares for ordinary shares on the basis of a predetermined ratio

Callable: can be redeemed at specified future dates and at stipulated prices at the option of the issuing corporation Redeemable: shares have a mandatory redemption period or a redemption feature that the issuer cannot control

Preference Shares
IAS 32, par. 18a A preference share that provides for mandatory redemption by

the issuer for a fixed or determinable amount at a fixed or determinable

future date, or gives the holder the right to require the issuer to redeem the instrument at or after a particular date for a fixed or determinable

amount, is a financial liability.

Preference Shares
IAS 32, AG 25 A preference share that provides for redemption on a

specific date or at the option of the holder contains a financial liability

because the issuer has an obligation to transfer financial assets to the holder of the share An option of the issuer to redeem the shares for

cash does not have a present obligation to transfer financial assets to the
shareholders.

Preference Shares
Other Characteristics of Preference Shares
A preference to dividends does not guarantee a dividend distribution If a corporation fails to declare a dividend, or declares a dividend which is less than the stated rate of the preference shares, the passed dividend of noncumulative preference shares will never be paid For cumulative preference shares, the amount of passed dividends become

dividends in arrears, which have the highest priority in the following periods
Ordinary shares cannot be paid any dividend until the preference shares dividends in arrears have been paid Dividends in arrears are not liabilities, but must be disclosed

Preference Shares
Haskell Corp. has 10 000 ordinary shares outstanding that have a par of P5/share, and 5 000, 6% cumulative preference shares outstanding that

have a par value of P10/share. If dividends of P10 000 were declared,

a. How much of the dividends will be allocated to the preference shares?

b. What will be the per-share dividend received by each ordinary

share?

Suppose only P1 000 was declared as dividends, how much will each
type of share receive as dividends?

Preference Shares
If Haskell declared dividends amounting to P8 000 the following year, a. How much will be received by the preference shares?

b. How much will be received by each ordinary shares?

Options, Rights and Warrants

Options
a contract that gives the holder the right, but not the obligation, to subscribe to the entitys shares at a fixed or determinable price for a specific period of time (IFRS 2)

Warrants
certificates entitling the holder to acquire shares at a certain price within a stated period (Kieso, Weygandt, Warfield, Intermediate Accounting Volume 2)

Rights
right of the old shareholder to purchase newly issued shares in proportion
to their holdings

Options, Rights and Warrants

Skousen, Stice and Stice; Intermediate Accounting 12th Edition

Rights issued to existing shareholders to permit them to maintain their

proportionate ownership interests when new shares are to be issued

Warrants sold by the corporation for cash, generally in conjunction with the
issuance of another security

Options granted to officers or employees, usually as part of a compensation plan

Options, Rights and Warrants

Characteristics
There is always an underlying stock.

They always expire.

Issuers: mainly corporations, some third party *Most warrants are issued as part of a package. results in compound instruments

may be detachable or not

Purpose
increase attractiveness of offering

reduce financing cost

Options, Rights and Warrants

IFRS 2, par. 7
An entity shall recognize the goods or services received or acquired in a share-based payment transaction when it obtains the goods or as the services are received. The entity shall recognize a corresponding increase in equity if the goods or services were received in an equity-settled share-based payment transaction

Recognition par. 11 1. Fair value of the goods received 2. Fair value of the equity instruments granted Exception: transactions with employees (in their capacity as employees) - Fair value of the equity instruments issued measured at grant date

Options, Rights and Warrants

Explanation: par. 12
Not possible to measure directly the services received Not possible to measure fair value of the total remuneration package without measuring directly the fair value of the equity instruments granted Shares or share options are sometimes granted as part of a bonus arrangement; estimating the fair value of those additional benefits is likely to be difficult.

Options, Rights and Warrants

Clove Corp. issued P5M,7%,5-year bonds with detachable warrants at the beginning of the year. Each warrant entitles the holder to buy 10 of

its shares at P10/share for every P1 000 bond. At the time of the issue,
Cloves shares were selling at P20/share. Total proceeds from the issuance was P4 500 000. Fair value of the warrants at the time of the

issuance of the bonds was P50. Without the warrants, the bonds would
sell at 10%.

Options, Rights and Warrants

IAS 32, par. 31 When the initial carrying amount of a compound financial

instrument is allocated to its equity and liability components, the equity

component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for

the liability component The sum of the carrying amounts assigned to

the liability and equity components on initial recognition is always equal to the fair value that would be ascribed to the instrument as a

whole. No gain or loss arises from initially recognizing the components

of the instrument separately.

Options, Rights and Warrants

IAS 32, AG 32 On conversion of a convertible instrument at maturity, the

entity derecognizes the liability component and recognizes it as equity.

The original equity component remains as equity (although it may be transferred from one line item within equity to another). There is no

gain or loss on conversion at maturity.