Discuss how JL should account for the financial instrument on the balance sheet (debt or equity) given that JL might be reporting under both US GAAP (ASC 480) and IFRS (IAS 39). Discuss any ramifications of this classification.
Jillian Limited (JL) issued a financial instrument with the following terms:
► A face value of $100.
► Not secured by any assets of the entity (unsecured).
► Redeemable in cash at the option of the issuer.
► Pays 5% of face value annually.
► The 5% doubles in five years (to 10%) if the financial instrument is not redeemed. In 10 years, the annual payments double again if not redeemed by that time.
Other information to consider:
► Current interest rates are 4%. Rates are expected to remain stable or decline in the short to midterm.
► JL currently has a loan outstanding with the bank. Under the terms of the loan agreements, the debt-to-equity ratio may not exceed 2:1. Currently, before accounting for the new instrument, the debt-to-equity ratio is 2:1.
► JL is a public company (SEC registrant) and is considering listing on the London Stock Exchange, which would require reporting under IFRS.
|Due By (Pacific Time)
||11/23/2013 12:00 pm