Cambridge Ltd is a public company supplying different types of packaging for the food and bev¬erage industry. Among its products are labels for beer bottles, soft-drink bottles and jam jars and tins, and packages for frozen foods, cheese, yoghurt, confectionery and snack foods.

Cambridge Ltd has reported sales of approximately $25 million for the year ended 30 June 2016. The directors of the company have been considering a public share offer and have contacted a merchant banker to investigate the possibility.

On 15 November 2016, the company made a private placement of 100 000 8% cumulative, redeemable, non-participating preference shares at an issue price of $2.50 per share. The share issue was made for the purpose of financing expansion of needed plant and equipment. Each pref¬erence share is convertible into two ordinary shares at the option of the holder, and is subject to mandatory conversion in the event of a public share issue or mandatory redemption in cash on 15 November 2021 for $4.00 per share, whichever occurrence is the earlier. It is expected that no cumulative preference dividends will be due when the preference shares are converted.

In preparing its draft general purpose financial reports for the year ended 30 June 2017, the chief accountant of Cambridge Ltd, Adam Brown, disclosed the preference shares in the equity section. Brown did not adjust periodically the carrying amount of the preference shares for the difference between the issue price and the redemption price.

On examining the draft financial reports, Cambridge Ltd’s auditor argued that the preference shares should be regarded as long-term debt financing and reported as non-current liabilities, and that the periodic adjustment, representing the difference between the issue price and the redemption price, should be reported over time as interest expense in the income statement.

Required

Discuss, with reference to the Conceptual Framework, the appropriate accounting treatment for these preference shares and for the potential increase in the redemption price.