From Cases

Question 1

Retractable Preference shares are added to equity or liability? ASPE

Answer 1

Retractable shares meet the definition of a financial liability because they give the holder the right to require the issuer to redeem or repurchase the shares on demand.

Prior to these amendments, ASPE 3856 Financial Instruments included an exception to this classification, instead requiring preferred shares issued in a tax planning arrangement to be recorded at par, stated, or assigned value and to be presented as a separate line item in the equity section of the balance sheet.

The amendments state that all retractable shares must be classified as a financial liability measured at their redemption value unless all three conditions are met which would allow management to elect to apply equity classification. Specifically, the three conditions are:
1. Control of the enterprise must be retained by the party receiving the retractable shares (e.g., the shareholder);
2. Shares of the enterprise must be the only consideration involved in the transaction; and
3. The non-existence of a share redemption schedule.

ASPE 3856 Financial Instruments