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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). 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 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 requires the following presentation/disclosure for public companies with redeemable equity instruments that are classified outside of permanent equity:

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.

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.

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. 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 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
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