ASC 480-10: Classification of Redeemable Equity Instruments & Journal Entries
Posted In | ASC Education | Gridlex AcademyRedeemable equity instruments are financial instruments that give the holder the right to require the issuer to redeem the instrument for cash, other assets, or other equity instruments. ASC 480-10, Redeemable Financial Instruments - Overall, provides guidance on the classification and measurement of redeemable equity instruments in a company's financial statements. This article explains the classification of redeemable equity instruments transactions under ASC 480-10, along with illustrative journal entries.
Understanding Redeemable Equity Instruments
Redeemable equity instruments are a type of hybrid security that combines features of both debt and equity. These instruments are typically issued by companies to raise capital while providing flexibility for investors to redeem their investment at a future date or under specific circumstances. Some examples of redeemable equity instruments include redeemable preferred shares and mandatorily redeemable common shares.
Classification of Redeemable Equity Instruments under ASC 480-10
Under ASC 480-10, redeemable equity instruments are classified as either temporary equity or mezzanine equity, depending on the terms and conditions of the instrument. The classification determines how the instrument is presented in the financial statements.
1. Temporary Equity: Redeemable equity instruments are classified as temporary equity if the redemption is at the option of the holder or is contingent upon an event that is not solely within the control of the issuer. These instruments are presented separately from permanent equity in the financial statements.
2. Mezzanine Equity: Redeemable equity instruments are classified as mezzanine equity if the redemption is mandatory or is contingent upon an event that is solely within the control of the issuer. These instruments are presented between liabilities and permanent equity in the financial statements.
Journal Entries for Redeemable Equity Instruments Transactions
To illustrate the journal entries for a redeemable equity instruments transaction, let's assume a company issues 10,000 redeemable preferred shares with a par value of $100 per share, and the shares are classified as temporary equity.
1. Record the issuance of redeemable preferred shares:
Dr. Cash $1,000,000 (10,000 shares x $100 par value)
Cr. Redeemable Preferred Shares $1,000,000
2. Record the redemption of redeemable preferred shares (if and when they are redeemed):
Dr. Redeemable Preferred Shares $1,000,000
Cr. Cash $1,000,000
ASC 480-10 provides guidance on the classification and measurement of redeemable equity instruments in a company's financial statements. By understanding the classification rules and journal entries associated with redeemable equity instruments, companies can accurately present these hybrid securities in their financial statements. Proper accounting for redeemable equity instruments helps maintain transparent financial reporting and enables stakeholders to make informed decisions about a company's financial position and performance.