Content area
Full Text
Abstract:
This article focuses on equity instruments. There are presented the characteristics of ordinary and preference shares. There are described the types and characteristics of preference shares such as: cumulative preference shares, participating preference shares, convertible preference shares, callable preference shares and redeemable preference shares. Treasury shares are also described. The accounting records are based on IAS 32 Financial Instruments: Presentation. There are presented the conditions when a puttable instrument is classified either as equity or as financial liabilities under IFRS.
Keywords: equity instrument, ordinary shares, common stock, dividends, preference shares, cumulative preference shares, treasury shares, par value, outstanding capital, authorized capital, puttable instrument
JEL: G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Goodwill; H32 - Firm M41 - Accounting.
"An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities, liabilities, where liabilities are defined as the present obligations of the entity arising from past events, the settlement of which are expected to result in an outflow from the entity of resources embodying economic benefits (i.e., an outflow of cash or other assets of the entity)" (Barry J. Epstein and Eva K. Jermakowicz, 2010, page 820).
The shares (named also stocks in U.S.A.) of an entity may be divided into two major types: ordinary shares or equity shares (named also common stock in U.S.A.) and preference or preferred shares (preferred stock in U.S.A.) Both may be split into smaller classes of shares. Owners of shares are referred to as shareholders or stockholders. Ordinary shares and preference shares have different rights.
Generally, ownership stock conveys the next four rights to shareholders:
a) sharing of profits and losses from the present year and/or and previous years;
b) voting rights;
c) liquidation rights; and
d) the opportunity to purchase additional shares if issued its class.
The holders of preference shares (preference shareholders) have the right to receive income - as dividends -before any holders of ordinary shares (ordinary shareholders). In other words the dividends for preference shares must be paid before the dividends for ordinary shares (Sunil Parameswaran, 2011, page 119).
"Preferences as to assets exist when the preferred shares have a stipulated liquidation value. If a corporation were to...