02 Options, Rights and Warrants
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Transcript of 02 Options, Rights and Warrants
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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
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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
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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.
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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.
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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 non-
cumulative 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
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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?
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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?
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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)
Warrantscertificates 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
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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
Optionsgranted to officers or employees, usually as part of a compensation plan
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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
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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
Recognitionpar. 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
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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.
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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%.
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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.
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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.