Research On Classification Of Liabilities Or Equity And Economic Consequences Of Preferred Stocks Under Different Accounting Standards

With the rapid economic development,corporate financing methods are becoming more and more diversified.At the same time,the continuous development and improvement of the capital market has further accelerated the birth of various new financial instruments.Among the many new financing instruments,preferred stocks have increasingly become the best choice for companies to raise capital in the capital market.However,due to the fact that preferred stocks exhibit both the characteristics of debt and the characteristics of equity,as well as the exceptional flexibility of the terms of its issuance,the accounting treatment of the preferred stock has always been controversial,especially in the classification of liabilities or equity.Because the different classifications of preferred stocks will have very different impacts on the enterprise,which may lead to situations in which the report information does not truly reflect the business situation of the enterprise,causing investors to incorrectly estimate the true value of the enterprise.Therefore,studying the classification and impact of preferred stocks under different accounting standards is of great significance to the development of Chinese accounting standards and capital markets.First of all,this article introduces the basic information of preferred stocks,and discusses its duality of stock and debt and related knowledge of convertible and redeemable preferred stocks.Compare the theory of differentiating liabilities from equity and its impact on the development of accounting standards.Discuss the exploration and regulation of the liability or equity classification of financial instruments by GAAP and IFRS.Secondly,this article starts with the analysis of the convertible and redeemable preference shares issued by Xiaomi Company,studies the specific provisions of the Xiaomi Company's preferred stock issuance terms,and analyzes the classification and impact consequences of this type of preferred stock under different accounting standards.The research results show that when Xiaomi's preferred stock is classified as a financial liability under the IFRS,it cannot reflect the company's true operating conditions,which has serious consequences.The effects are specifically reflected in:(1)loss of net profit;(2)abnormal capital structure;(3)decline in the company's stock price and valuation;(4)blocked CDR issuance;(5)suspected earnings management.The analysis of the financial substance of Xiaomi's financial instruments and the calculation of the company's EVA also confirmed the correctness of the above analysis.Unlike the IFRS,under the GAAP,Xiaomi's preferred stock can be classified as mezzanine equity.By re-calculating the balance sheet,profit statement and related financial indicators,it is found that the adjusted statement is closer to the true operating situation of Xiaomi.The classification of liabilities or equity of convertible and redeemable preference shares under the GAAP guidelines is more in line with the economic substance of the preference shares themselves.Finally,the International Accounting Standards Board explicitly stated in IAS 1: If strict compliance with the standards would deviate financial reporting from its actual meaning,then strict compliance with the standards should not continue.Based on this,this article combines the results of case studies to reflect on the reasons for such problems under the IFRS from three perspectives: the terms of the contract for preferred shares,the perspective of the needs of information users and the shortcomings of the standard itself.Suggestions on accounting treatment for all companies that issue preferred stocks similar to Xiaomi:(1)take into account changes in the fair value of preferred stocks into other comprehensive income;(2)strengthen the use and management of non-recognized accounting indicators;(3)strengthen the disclosure of information related to preferred shares.At the same time,five points are proposed for the future development of China's standards and capital markets:(1)focus on the economic essence of financial instruments;(2)use other standards reasonably;(3)regulate information disclosure;(4)adopt multi-dimensional evaluation indicators;(5)prudent use of fair value measurement.