A company enters into an arrangement with its trade creditors to defer payment. In return for this the creditors:
1. Will be paid in full at some specifed but uncertain event in the future
2. Will be paid interest calculated from the date of the invoice to the date of payment
3. Are issued now, at no cost, redeemable preference shares (no rights at all other than what follows) £ for £ with the amount of their invoices outstanding (i.e. if they have £10k of outstanding debt, they get issued 10k £1 redeemable preference shares). Redemption terms are they get 50% of par if, at the company's option, they are redeemed within one year of the above specified but uncertain event OR 2x par at the earlier of 5 years from the above specified but uncertain event and disposal of more than 50% of the ordinary share capital.
Very generous, I'm sure you'll agree. Especially as the specified but uncertain event is now becoming more certain.
How do I account for the issue of the preference shares under FRS105? Obviously the prefs are debt rather than equity, but what is the Dr entry? I would have said that it, in effect, increases the cost of the original invoice but by 50% or 100%? If it's 50%, where do I put the other 50%?
Hopefully this is clear enough, but my brain is fried so if I need to expand, please let me know.