8.3 Entities That Have No Equity-Classified Shares
8.3.1 Separate Presentation and Disclosure
ASC 480-10
45-2 Entities that have no equity instruments outstanding but have financial instruments issued in the form of shares, all of which are mandatorily redeemable financial instruments required to be classified as liabilities, shall describe those instruments as shares subject to mandatory redemption in statements of financial position to distinguish those instruments from other liabilities. Similarly, payments to holders of such instruments and related accruals shall be presented separately from payments to and interest due to other creditors in statements of cash flows and income.
50-4 Some entities have no equity instruments outstanding but have financial instruments in the form of shares, all of which are mandatorily redeemable financial instruments required to be classified as liabilities. Those entities shall disclose the components of the liability that would otherwise be related to shareholders’ interest and other comprehensive income (if any) subject to the redemption feature (for example, par value and other paid-in amounts of mandatorily redeemable instruments shall be disclosed separately from the amount of retained earnings or accumulated deficit).
If an entity determines that none of its financial instruments qualify as equity
because all of its shares meet the definition of a mandatorily redeemable
financial instrument in ASC 480, special presentation and disclosure
requirements apply. The liability-classified shares are presented separately
from other liabilities and described as “shares subject to mandatory redemption”
in the statement of financial position. Further, payments and accruals on such
instruments are presented separately in the statement of cash flows and the
statement of financial performance. Moreover, an entity should disclose the
components of the liability that would otherwise be related to shareholders’
interest and other comprehensive income (e.g., par value, APIC, retained
earnings or accumulated deficit, and accumulated other comprehensive income
attributable to those shares). An entity should also disclose the nature and
composition of the mandatorily redeemable instruments (e.g., the event
triggering redemption, the number of shares issued and outstanding, and the
value associated with those financial instruments).
In ASC 480-10-55-64 below, the FASB provides an example of stock that must be redeemed upon the death of the holder.
ASC 480-10
Example 1: Mandatorily Redeemable Financial Instruments — Stock to Be Redeemed Upon Death of the Holder
55-64 This Example illustrates the application of the guidance in this Subtopic to stock to be redeemed upon the death of the holder. An entity may issue shares of stock that are required to be redeemed upon the death of the holder for a proportionate share of the book value of the entity. The death of the holder is an event that is certain to occur. Therefore, the stock is classified as a liability. (An insurance contract that would cover the cost of the redemption does not affect the classification of the stock as a liability.) If the stock represents the only shares in the entity, the entity reports those instruments in the liabilities section of its statement of financial position and describes them as shares subject to mandatory redemption so as to distinguish the instruments from other financial statement liabilities. The issuer presents interest cost and payments to holders of such instruments separately, apart from interest and payments to other creditors, in statements of income and cash flows. The entity also discloses that the instruments are mandatorily redeemable upon the death of the holders. The following presentation is an example of the required presentation and disclosure for entities that have no equity instruments outstanding but have shares, all of which are mandatorily redeemable financial instruments classified as liabilities.
8.3.2 Difference Between Redemption Price and Book Value
ASC 480-10
45-2A Some entities have outstanding shares, all of which are subject to mandatory redemption on the occurrence of events that are certain to occur. The redemption price may be a fixed amount or may vary based on specified conditions. If all of an entity’s shares are subject to mandatory redemption and the entity is not subject to the deferral in paragraphs 480-10-15-7A through 15-7F, an excess of the redemption price of the shares over the entity’s equity balance shall be reported as an excess of liabilities over assets (a deficit), even though the mandatorily redeemable shares are reported as a liability. If the redemption price of the mandatorily redeemable shares is less than the book value of those shares, the entity should report the excess of that book value over the liability reported for the mandatorily redeemable shares as an excess of assets over liabilities (equity).
The measurement of a mandatorily redeemable financial instrument under ASC 480-10-35-3 is based not on the holder’s interest in the net book value of the entity but on the amount to be paid on settlement of the instrument (i.e., the redemption value). Therefore, the carrying amount may differ from the net book value attributable to an instrument, in which case ASC 480-10-45 requires the excess or deficit to be presented separately. If the carrying amount of mandatorily redeemable financial instruments exceeds their net book value, the excess is reported as an “excess of liabilities over assets (a deficit).” If the net book value exceeds the carrying amount, the surplus is reported as “excess of assets over liabilities (equity).”
When all of an entity’s shares are mandatorily redeemable financial instruments and contractually must be redeemed at their book value, the entity generally would report no net income after deducting interest cost on those shares. When all of an entity’s shares are mandatorily redeemable financial instruments and contractually must be redeemed at an amount other than their net book value, however, changes in the carrying amount of the liability-classified mandatorily redeemable financial instruments could be greater or less than net income before interest cost on those shares is deducted.
FASB Staff Position FAS 150-2 (superseded as a result of the Codification) contains two examples of an entity’s transition to FASB Statement 150 and its post-transition accounting when all shares are mandatorily redeemable and the redemption value differs from the entity’s book value. Except for the entries related to transition, those examples continue to be relevant and are reproduced below (the transition entries have been removed).
FASB Staff Position FAS 150-2
Illustrations of
Accounting for Mandatorily Redeemable Shares With a
Redemption Value That Differs From the Company’s
Book Value [footnote omitted]
Example
1
Assume . . . that the fair value (which
equals the redemption value) of the mandatorily
redeemable shares is $20 million and the book value of
those shares is $15 million, of which $10 million is
paid-in capital. [In this case,] the company would
recognize a liability of $20 million . . . .
Subsequently, net income attributable to the mandatorily
redeemable shares is $1 million for the year 20XX and
the fair value of those shares at the reporting date of
December 31, 20XX, is $21.2 million. Also assume that
the company did not pay any cash dividends.
The following illustrates the statement
of position at January 1, 20XX, and December 31, 20XX,
and the statement of income for the year ended December
31, 20XX (income tax considerations have been
disregarded):
Example
2
Assume the same facts as in Example 1
except that the shares are to be redeemed at an amount
($11 million) that is less than their book value. . .
.
The following illustrates the statement
of position at January 1, 20XX: