Big Spender Ltd has experienced significant cash flows problems in recent years and has borrowed money from a bank. Due to declining sales the company requires additional cash but the bank has advised the company that any increase in their total liabilities will result in a breach of their debt covenants. Consequently, the company decided to issue preference shares to raise the additional cash required. The preference shares are issued with the following characteristics:

5% dividend

Redeemable at a fixed date

No voting rights

Secured by a letter of credit

Required:

1. Should these preference shares be classified as debt or equity? Explain why.

2. Identify two financial implications of incorrectly classifying the preference shares and explain a possible social impact for each of these.
The IASB’s Revised Conceptual Framework (2018) re-introduced the term “stewardship” in its objective of financial accounting. Explain what the term “stewardship” 

3. means and its importance, drawing parallels between Big Spender Ltd and the Centro Case (ASIC vs Healey (2011)).

Answer rating: 100% (QA)

1 The preference shares should be classified as equity because they do not represent a claim on the ... View the full answer