Preference Share and Convertible Note Essay

The issue to be considered here is if the legal form of a preference share or a convertible note is paramount or more important than all other things? I do believe this statement is not appropriate and the substance of a preference share or a convertible note is more important than the legal form. Body From the perspective of users, the disclosure in financial statements is the most vital approach to provide information about the financial position, performance and changes in financial position of the reporting entity. As the equity and the liability always lead to different effects to the reporting entity, so the disclosure of the equity and the liability could lead to users’ different decisions. Therefore, when classifying the equity and the liability, the reporting entity should adhere to the principle of substance over form in AASB Framework para. 35. Based on the above statement, some analysis of this case are as follow: 1. As shown in AASB 132 para. AG25, preference shares, which are redeemable on a specific date or at the option of the holder, should be classified as liabilities rather than equity, and the reason is that the issuer has an obligation to transfer assets to the holder of the preference shares; however, preference shares, which are redeemable at the option of the issuer, should be classified as equity rather than liabilities, since there has no obligations for the issuer to transfer assets to the shareholder. AASB 132 para. AG25 and AG26 also outline that, the classification for non- redeemable preference shares is based on the substance of the arrangement or the rights attach to the shares, rather than the legal form. 2. As shown in Framework, the convertible notes would be classified as equity if conversion to equity is the probable outcome, while the convertible notes would be classified as liabilities if redemption at maturity is the probable outcome. Or as shown in AASB 132 para. 29, convertible notes should be classified separately based on two components: liabilities, since convertible notes are contractual arrangements to deliver cash or another financial asset; and equity, since convertible notes are call options granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity. In addition, AASB 132 para. AG32 illustrate  that n conversion of a convertible instrument at maturity, the entity derecognizes the liability component and recognizes it as equity, and the original equity component remains as equity. Conclusion Base on the above analysis, I do believe that this statement in this is not appropriate. Since when classified a preference share or a convertible note, according to AASB Framework and AASB standards, the substance over form.