The Accounting Treatment Of Convertible Redeemable Preferred Stock Is Studied Based On The Distinction Between Liability And Equity

In recent years,with the increase of private equity,convertible redeemable preferred stock,an innovative financial instrument,has become a new favorite for start-ups to raise funds.However,due to the flexibility of its issuance terms,it is involved in an international accounting problem--the distinction between financial liabilities and equity instruments.In recent years,due to the improper accounting treatment of convertible redeemable preferred stock,there are more and more cases that the financial statements" deviate" from the economic essence,which frequently leads to the investors,misinterpretation of the real value of the issuing enterprises,and then it also reveals that IFRS still has many problems in dealing with such financial instruments.In this situation,the study of accounting treatment of convertible redeemable preferred shares combined with IFRS is of great practical significance to the development of China's venture capital field.When XiaoMi group listed on the Hong Kong stock exchange in May,2018,it recognized convertible redeemable preferred shares as financial liabilities under the international accounting standards,and recorded the changes in fair value into the current profits and losses in the subsequent measurement.Therefore,with the increase of the valuation of XiaoMi group itself,its enhanced strength instead led to its financial situation of huge losses.In 2017,XiaoMi's profit statement presented a value of-43.9 billion yuan,of which 54.1 billion yuan was caused by the convertible redeemable preferred stock and included in financial liabilities.After excluding its influence,XiaoMi's net profit in 2017 was 5.4 billion yuan.Based on this case,this paper studies the clauses in IFRS and GAAP that distinguish financial liabilities from equity instruments.This paper mainly studies from the following four aspects:(1)the process and related accounting treatment of XiaoMi group to include preferred shares in financial liabilities according to IFRS.It was found that the convertible redeemable preferred shares included in the financial liabilities led to the "huge loss" of the net profit of XiaoMi group despite the rising operating income and the abnormal high asset-liability ratio,which led to the loss of enterprise value and other problems.(2)according to generally accepted accounting principles in the United States,the preferred stock can be included in the mezzanine equity between liabilities and equities.This paper recompiles the summary profit statement and balance sheet of XiaoMi group under the American standard and analyzes them.(3)after comparing the above two options,it is found that the financial picture after including the mezzanine equity is closer to the real financial situation of XiaoMi.Moreover,based on the assumption of rational person,XiaoMi group has no obligation to pay cash consideration when the redemption right is not exercised.Therefore,the convertible redeemable preferred shares issued by XiaoMi group do not accord with the essence of financial liabilities.(4)at the end of this paper,Suggestions are put forward from other perspectives to solve the emerging problems in the XiaoMi case.First,the fair value changes brought by the valuation can be included into other comprehensive earnings.Second,investors and businesses can turn to non-gaap.