Sirus is a large national public limited company (plc). The directors’ service agreements require

Sirus is a large national public limited company (plc). The directors’ service agreements require each director to purchase ‘B’ ordinary shares on becoming a director and this capital is returned to the director on leaving the company. Any decision to pay a dividend on the ‘B’ shares must be approved in a general meeting by a majority of all of the shareholders in the company. Directors are the only holders of ‘B’ shares.

Sirus would like advice on how to account under International Financial Reporting Standards (IFRSs) for the following events in its financial statements for the year ended 30 April 20X8.

(a) The capital subscribed to Sirus by the directors and shareholders is shown as follows in the statement of financial position as at 30 April 20X8:

Equity

$m

Ordinary ‘A’ shares

100

Ordinary ‘B’ shares

20

Retained earnings

30

Total equity

150

On 30 April 20X8 the directors had recommended that $3 million of the profits should be paid to the holders of the ordinary ‘B’ shares, in addition to the $10 million paid to directors under their employment contracts. The payment of $3 million had not been approved in a general meeting. The directors would like advice as to whether the capital subscribed by the directors (the ordinary ‘B’ shares) is equity or a liability and how to treat the payments out of profits to them.

 

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