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Preferred stock is an equity security with preferential rights generally not associated with common stock. Like common stock, reporting entities may have multiple classes of preferred stock.
The balance sheet presentation of preferred stock depends on whether it is (1) perpetual or non-redeemable (FSP 5.6.2.1), (2) mandatorily redeemable (FSP 5.6.3.1), or (3) contingently redeemable (FSP 5.6.3.1). The determination of how to classify redeemable preferred stock is addressed in FG 7.

5.6.1 Disclosure

Preferred stock often has a preference in liquidation in which the preferred stock has a claim on proceeds equal to its par or stated value. However, there are situations when the preferred stock has a preference that is considerably in excess of the par or stated value of the stock. When such a preference exists, ASC 505-10-50-4 indicates that reporting entities should disclose this on the face of the balance sheet. Further, S-X 4-08(d) requires public companies that have preferred stock with a liquidation preference other than par or the stated value to disclose the preference on the face of the balance sheet regardless of whether it is considerably in excess of the par or stated value of the stock.
In addition to the general requirements outlined in FSP 5.4, ASC 505-10-50-5 requires a reporting entity with preferred stock with preferences to disclose the following on the face of the balance sheet or in the footnotes:
  • Aggregate or per-share amounts at which the preferred stock is called or is subject to redemption through sinking-fund operations or otherwise
  • Aggregate and per-share amounts of cumulative preferred dividends in arrears
Further, S-X 4-08(d) requires public companies to disclose any restrictions upon an involuntary liquidation that results from a preference that exceeds the par or stated value of the related shares.

5.6.2 Perpetual preferred stock (no redemption provisions)

Perpetual, or non-redeemable, preferred stock, by its legal terms, has no contractual redemption provisions.

5.6.2.1 Balance sheet presentation

Absent any conversion or exchange provisions, preferred stock is generally classified in equity. However, reporting entities should consider whether substantive redemption features exist, in which case it may be classified outside of equity (e.g., mezzanine equity), or as a liability. See FG 7.3.
In addition to the general disclosure requirements outlined in FSP 5.4, a reporting entity with non-redeemable preferred stock should state on the face of the balance sheet (or if more than one issue is outstanding, in the footnotes) the following for each issue in accordance with S-X 5-02 (28):
  • Title
  • Dollar amount
  • Dollar amount of any shares subscribed but unissued and the deduction of subscriptions receivable
On the face of the balance sheet or in the footnotes, the reporting entity should disclose the number of shares authorized and the number of shares issued or outstanding for each issue. In the footnotes or in a separate statement, it should disclose the changes in each class of non-redeemable preferred stock for each period an income statement is presented.

5.6.3 Redeemable preferred stock

Preferred stock may have redemption features in which the preferred shares may be exchanged for cash. Preferred stock that is redeemable at the option of the issuer (i.e., the issuer has a call option) would follow the same presentation and disclosure requirements as perpetual preferred stock (see FSP 5.6.2.1). Preferred stock may also have a mandatory redemption feature or a redemption feature outside of the control of the issuer.

5.6.3.1 Balance sheet presentation

A public reporting entity should state on the face of the balance sheet the following for each issue of redeemable preferred stock in accordance with S-X 5-02 (27).
  • Title
  • Carrying amount
  • Redemption amount
  • Dollar amount of any shares subscribed but unissued and the deduction of subscriptions receivable
  • The number of shares authorized and the number of shares issued or outstanding for each issue (either on the face of the balance sheet or in the footnotes)
If a reporting entity has multiple issues of such instruments outstanding, it may combine the amounts on the face of the balance sheet if appropriate disclosure is included in the footnotes.
Mandatorily redeemable
ASC 480-10-25-4 requires reporting entities to present mandatorily redeemable preferred stock that does not contain a conversion option as a liability on the balance sheet. Financial instruments in the scope of ASC 480 should be presented as liabilities on the balance sheet, and not as items in the mezzanine section (i.e., not between the liabilities section and the equity section in the balance sheet).
ASC 480-10-45-2 addresses the presentation of payments to holders of such instruments (e.g., dividends on the "equity" shares) as well as the presentation by entities that do not have other "equity" instruments.

ASC 480-10-45-2

Entities that have no equity instruments outstanding but have financial instruments issued in the form of shares, all of which are mandatorily redeemable financial instruments required to be classified as liabilities, shall describe those instruments as shares subject to mandatory redemption in statements of financial position to distinguish those instruments from other liabilities. Similarly, payments to holders of such instruments and related accruals shall be presented separately from payments to and interest due to other creditors in statements of cash flows and income.

Redeemable outside control of the issuer
Public companies are required to present contingently redeemable preferred stock (i.e., redeemable upon the occurrence of an event outside the control of the issuer) and preferred stock that is redeemable at the option of the holder, in mezzanine equity. Mezzanine equity is presented after liabilities and before stockholders' equity on the balance sheet. The purpose of this classification is to convey to the reader that such a security may not be permanently part of equity and could result in a demand for cash or other assets of the entity in the future.
Reporting entities should present redeemable securities that are classified as mezzanine equity separate from stockholders’ equity accounts that are classified as permanent equity (e.g., non-redeemable preferred, common stock, and retained earnings). ASR 268, codified in ASC 480-10-S99-1, specifically prohibits the use of the term “stockholders’ equity” as a caption to present the combined total of all equity securities and redeemable preferred stock.
The SEC has stated that it will not accept liability classification for redeemable instruments that do not meet the requirements for liability classification in ASC 480. These instruments should be classified as mezzanine equity based on the guidance in ASC 480-10-S99.
Private companies are not required to present contingently redeemable preferred stock in mezzanine equity. However, mezzanine equity classification is strongly encouraged for private companies, especially in those circumstances when there is not a high likelihood that the capital is in fact permanent (e.g., when preferred stock is redeemable at the option of the holder at any time). On the other hand, use of a mezzanine presentation may be considered less relevant in other circumstances, such as when preferred stock is redeemable by the holder only upon a remote event. If a private company does not elect mezzanine presentation, it should consider separate presentation from other items within equity. Regardless of whether a nonpublic entity adopts the mezzanine equity presentation, ASC 505-10-50-11 requires specific disclosures for redeemable securities. Refer to FSP 5.6.3.2 for further information.

5.6.3.2 Disclosure

ASC 505-10-50-11 requires a reporting entity to disclose the redemption requirements for each of the five years following the latest balance sheet only for stock redeemable at fixed or determinable prices and redeemable on fixed or determinable dates. In contrast, S-X 5-02 requires this disclosure for all redeemable preferred stock issued by SEC registrants.
For mandatorily and contingently redeemable securities whose redemption is outside the control of the issuer, in addition to the information in FSP 5.4, S-X 5-02 (27) requires disclosure of the following in a footnote labeled "Redeemable Preferred Stocks:"
  • General description of each issue, including redemption features
  • Rights, if any, of the holders in the event of default, and any impact on junior securities if a required dividend, sinking fund, or other redemption payment is not made
  • Redemption requirements in the aggregate for all issues for each of the five years following the latest balance sheet presented
  • Changes in each issue for each period a statement of comprehensive income is presented
  • A description of the accounting treatment for any difference between the carrying value and redemption amount
ASR 268, codified in ASC 480-10-S99-1, requires the following presentation/disclosure for public companies with redeemable equity instruments that are classified outside of permanent equity:

Excerpt from FRP 211.03

ASR 268:
Where redeemable preferred stocks are outstanding, the Commission will not prohibit the combining of non-redeemable preferred stocks, common stocks and other equity accounts under an appropriate designated caption (e. g., “Non-Redeemable Preferred Stocks, Common Stocks, and Other Stockholders’ Equity”) provided that any combinations be exclusive of redeemable preferred stocks.

FRP 211.04

ASR 268:
In the interest of clear and prominent disclosure of the future cash obligations attendant with these types of securities, the rules require disclosure of the terms of redemption, five-year maturity data, and changes in these securities in a separate note to the financial statements captioned “Redeemable Preferred Stocks.” It should be noted that although in the past a registrant may have disclosed changes in redeemable preferred stocks in a statement of stockholders’ equity, such changes are now required to be disclosed in a separate note as described above.

As noted in the excerpt, FRP 211.03 indicates that changes in redeemable preferred stock are required to be disclosed in a separate note. However, we believe that presentation of redeemable securities within the statement of changes in stockholders’ equity is permitted provided the statement is appropriately titled. If disclosed in the statement of changes in stockholders’ equity, the redeemable preferred stock should be excluded from total stockholders’ equity, and clearly delineated. Typically this is accomplished through the use of a “ black line.” We believe either alternative is appropriate.
Mandatorily redeemable
In addition to the disclosures in FSP 5.4, reporting entities that issue mandatorily redeemable securities classified as liabilities, pursuant to ASC 480-10-25, are required to provide the following disclosures in accordance with ASC 480-10-50:
  • Nature and terms of the financial instrument
  • Rights and obligations of the security, including any settlement alternatives in the contract, and the entity that controls the settlement alternatives
This guidance also requires the following disclosures for each settlement alternative:
  • Amount that would be paid, or the number of shares that would be issued and their fair value, determined based on the conditions in the contract if the settlement were to occur at the balance sheet date
  • How changes in the fair value of the issuer’s equity shares would impact the settlement amounts (see ASC 480-10-50-2(b) for example disclosure)
  • If applicable, the maximum amount that the issuer could be required to pay to redeem the instrument by physical settlement, the maximum number of shares that could be required to be issued, and that a contract does not limit the amount that the issuer could be required to pay or the number of shares that the issuer could be required to issue
  • For a forward contract or an option indexed to an issuer’s equity shares, the forward price or option strike price, the number of issuer’s shares that the contract is indexed to, and the settlement date or dates of the contract

5.6.4 Convertible preferred stock

Convertible preferred stock is equity that is convertible into common stock. It may be contingently convertible (e.g., convertible at the option of the issuer, upon an initial public offering, or when reaching a target stock price) or mandatorily convertible. Refer to FG 7.3 to determine if convertible preferred stock should be classified in permanent or mezzanine equity.

5.6.4.1 Balance sheet presentation

Convertible preferred stock classified in permanent equity should follow the balance sheet presentation requirements for non-redeemable preferred stock outlined in FSP 5.6.2.1.
Convertible preferred stock classified in mezzanine equity should follow the guidance discussed in FSP 5.6.3.1 for presentation requirements.

5.6.4.2 Disclosure—after adoption of ASU 2020-06

Reporting entities are required to include disclosures noted in FSP 5.4 for all convertible preferred stock. ASC 505-10-50-12 establishes disclosure objectives for convertible preferred stock in order for stakeholders to better understand the detailed disclosure requirements.

ASC 505-10-50-12

The objective of the disclosure about convertible preferred stock is to provide users of financial statements with:

  1. Information about the terms and features of convertible preferred stock
  2. An understanding of how those instruments have been reported in an entity’s statement of financial position and statement of financial performance
  3. Information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments.

Reporting entities should explain the pertinent rights and privileges of each convertible preferred stock instrument outstanding. ASC 505-10-50-13 provides a list of requirements for convertible preferred stock.

ASC 505-10-50-13

To comply with the general disclosure requirements of paragraph 505-10-50-3, an entity shall explain the pertinent rights and privileges of each outstanding instrument, including, but not limited to, the following information:

  1. Number of shares issued and par value
  2. Dividends
  3. Conversion or exercise prices or rates and number of shares into which the instrument is potentially convertible
  4. Pertinent dates, such as conversion date(s)
  5. Parties that control the conversion rights
  6. Manner of settlement upon conversion and any alternative settlement methods, such as cash, shares, or a combination of cash and shares
  7. Terms that may change conversion or exercise prices, number of shares to be issued, or other conversion rights and the timing of those rights (excluding standard antidilution provisions)
  8. Liquidation preference required by paragraph 505-10-50-4 and unusual voting rights
  9. Other material terms and features of the instrument that are not listed above.

For contingently convertible instruments, incremental disclosures are required. Reporting entities should disclose information about events or changes in circumstances that would adjust or change the contingency or would cause the contingency to be met in accordance with ASC 505-10-50-14. In addition, information on whether the shares that would be issued if converted are included in diluted EPS and the reasons why or why not should be disclosed. Other information that is helpful to understand the nature of contingencies and potential impact of conversion should also be disclosed.
Further, in accordance with ASC 505-10-50-15, reporting entities should disclose the amount of dividends declared for each period for which a statement of financial performance is presented, in addition to the existing disclosures required by ASC 505-10-50-5.
ASC 505-10-50-16 provides additional information reporting entities should disclose as of the date of the latest statement of financial position presented.

ASC 505-10-50-16

An entity shall disclose the following information as of the date of the latest statement of financial position presented:
  1. Changes to conversion or exercise prices that occur during the reporting period other than changes due to standard antidilution provisions
  2. Events or changes in circumstances that occur during the reporting period that cause conversion contingencies to be met or conversion terms to be significantly changed
  3. Number of shares issued upon conversion, exercise, or satisfaction of required conditions during the reporting period.

5.6.4.2A Disclosure—before adoption of ASU 2020-06

Reporting entities are required to include the disclosures noted in FSP 5.4 for all convertible preferred stock. In addition, ASC 505-10-50-6 requires reporting entities to disclose all terms of contingently convertible securities to help financial statement users understand both the nature of the contingency and the potential impact to the ownership of the reporting entity upon conversion. These should include:
  • What events or circumstances would cause the contingency to be met and other significant terms that will enable the user to understand the impact and potential timing of those rights
  • The conversion price and the number of shares into which the contingently convertible securities will potentially convert
  • If there are any events or circumstances that could change the contingency, the conversion price, or the number of shares into which they will ultimately convert, including the significant features of those circumstances
  • How the shares will settle upon conversion and if there are alternative settlement methods (for example, cash, shares, or a combination)
ASC 505-10-50-7 includes an example disclosure that addresses the preceding requirements.

Excerpt from ASC 505-10-50-7

The Company is obligated to issue X shares and as the market price of the common stock decreases, the Company is obligated to issue an additional X shares for each $1 decrease in the stock price.

Additionally, ASC 505-10-50-9 requires a reporting entity to indicate in the footnotes if the convertible preferred stock is included in diluted EPS and the reasons why or why not.

5.6.4.3 Contingently convertible preferred stock with related derivatives—after adoption of ASU 2020-06

In accordance with ASC 505-10-50-17, the disclosures in ASC 815 are also required for a conversion option that is accounted for as a derivative. ASC 505-10-50-18 requires reporting entities to disclose the following information about derivative transactions entered into in connection with the issuance of convertible preferred stock, regardless of whether the derivative transactions are accounted for as assets, liabilities, or equity instruments:
  • The terms of the derivative transactions (including terms of settlement)
  • How those derivative transactions relate to the convertible preferred stock
  • Number of shares underlying the derivative transactions
  • Reason for entering into those derivative transactions

5.6.4.3A Contingently convertible preferred stock with related derivatives—before adoption of ASU 2020-06

A reporting entity may enter into derivative instruments in connection with the issuance of contingently convertible preferred stock. In that instance, ASC 505-10-50-10 requires the reporting entity to explain in the footnotes the terms of any derivatives and their potential impact on the contingently convertible securities. The information might include:
  • The terms of the derivative instruments (including the terms of settlement)
  • How the derivative instruments relate to the contingently convertible securities
  • The number of shares underlying the derivative instruments

For additional information related to disclosures of derivatives, see FSP 19.

5.6.4.4A Discount on contingently convertible preferred stock—before adoption of ASU 2020-06

Preferred stock may be issued at a discount when the redemption value exceeds the proceeds received. ASC 505-10-50-8 requires a reporting entity that issues contingently convertible preferred stock at a discount to disclose in the footnotes the excess of (1) the aggregate fair value of the instruments the holder would receive at conversion, over (2) the proceeds received by the issuer, and the period over which the discount is accreted.
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