Kieso, Weygandt, Warfield, Young, Wiecek Intermediate Accounting, Eighth Canadian Edition 16-4 liability. 4. M a n d a t o r i l y r e d e e m a b l e o r t e r m p r e f e r r e d s h a r e s (although legally equity), meet the definition of a liability since there is an obligation for the company to pay cash. When the term expires, the company is obligated to buy back the shares from the holder. This is also the case when the terms are such that it is highly probable that the company will redeem the shares. Retractable preferred shares are shares where the holder has the right to require the issuer to redeem the shares for a fixed or determinable amount. This contractual obligation also meets the definition of a financial liability. 5. Measurement of hybrid financial instruments may also be made more complicated when the economic value is attributable to both the debt and equity components of the instrument. Two measurement tools are possible: the incremental or residual method and the
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