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4.12 Equity transactions
Publication date: 31 May 2022
us Foreign currency guide
The issuance of an equity classified instrument (e.g., common shares) is a nonmonetary transaction. When an equity classified instrument is issued in a foreign currency, it should be initially measured and recorded in the entity’s functional currency using the exchange rate on the issuance date. It should not be subsequently remeasured for changes in exchange rates during the period it is outstanding.
Some preferred equity shares are classified as mezzanine (temporary) equity or as a liability. This classification may impact the determination of whether it is a nonmonetary item.
4.12.1 Preferred shares
As discussed in ASC 480, Distinguishing Liabilities from Equity, preferred shares can be classified as permanent equity, mezzanine (temporary) equity, or a liability. Figure FX 4-3 summarizes the treatment of foreign currency transaction gains or losses for foreign denominated preferred shares.
Figure FX 4-3
Foreign currency transaction gains and losses on preferred shares
Foreign currency transaction gains and losses on preferred shares
Preferred share classification |
Example |
Treatment of foreign currency transaction gain or loss |
Liability
|
Nonconvertible, mandatorily redeemable preferred share
|
This is a monetary instrument. It should be initially measured and recorded in the functional currency of the issuer using the exchange rate on the date it is issued and subsequently measured using the exchange rate at each balance sheet date during the period it is outstanding, with an offsetting entry to the income statement as a foreign currency transaction gain or loss.
|
Temporary (mezzanine) equity
|
Preferred shares redeemable at the investor’s option
|
We believe a preferred share classified as mezzanine equity (pursuant to ASC 480-10-S99) should be initially measured and recorded in the functional currency of the issuer using the exchange rate on the date it is issued and should be subsequently measured using the exchange rate at each balance sheet date. The offsetting entry should be recognized in stockholder’s equity, consistent with the requirements of ASC 480-10-S99 to record these securities at their redemption value. If a preferred stock instrument classified in mezzanine equity is not being accreted to redemption value, because it is not probable that the security will become redeemable, then we believe that that security should not be adjusted until it is probable the security will become redeemable.
Any increases or decreases in carrying value of preferred stock classified as mezzanine equity due to currency exchange rate fluctuations should be treated as decreases or increases to income available to common shareholders for purposes of EPS, consistent with the treatment of accretions to redemption value.
|
Permanent equity
|
Perpetual preferred shares
|
This is a nonmonetary instrument. It should be initially measured and recorded in the functional currency using the exchange rate at issuance and is not subsequently adjusted for changes in exchange rates during the period it is outstanding.
|
See FG 7 for information on the accounting for preferred shares.
4.12.2 Dividends
Normally, dividends are declared and paid in a foreign entity’s functional currency. However, in certain cases, such as when an economy is highly inflationary, or when the functional currency is other than the currency of the economy in which the operation is domiciled, dividends may be declared and paid in other than the functional currency.
Foreign currency dividends are measured and recorded in the issuer’s functional currency using the exchange rate on the declaration date. When dividends are not paid on the declaration date, a dividend payable is recorded that is considered a monetary liability. Accordingly, the dividends payable account should be measured using the exchange rate in effect at the end of each reporting period it is outstanding with an offsetting entry to the income statement.
See FX 7 for information on dividends payable from a foreign entity to its parent.
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