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Mandatorily Redeemable Shares

What are 'Mandatorily Redeemable Shares'

Mandatorily redeemable shares are shares owned by an individual or entity which are required to be redeemed for cash or another such property at a stated time or following a specific event. Mandatorily reedemable shares are often issued by employers as a sort of compensation kicker to employees; however, the employer would require the employees to redeem these shares for cash or bonds, for example in the case of certain prescribed events or timelines.

Explaining 'Mandatorily Redeemable Shares'

One example of a situation where an employer would issue manditorily redeemable shares would be in the case of an employee quitting the firm. The employer would excercise its "call" option on these shares forcing the exiting employee to sell back his or her company shares. An employer might do this in a situation where the shares are restricted and greatly in the money, or if it is a closely-held company with relatively few shares in float.

Mandatorily Redeemable Shares FAQ

What are mandatorily redeemable shares?

Mandatorily redeemable shares are shares of stock an individual or entity owns, which must be reclaimed by the issuer for cash or another such property at a stated time or following a specific event.

What is a redeemable stock?

Redeemable preferred stock is a preferred stock that allows the issuer to buy it back at a specific price and retire it. Also known as callable preferred stock, redeemable preferred stock can benefit issuers because it gives them more financial flexibility.

Are redeemable shares debt or equity?

A redeemable preference share, where the holder can request redemption, is accounted for as debt even though legally it may be the issuer's share.

How is redeemable preferred stock accounted for?

Redeemable preferred stock allows the issuer to buy back the stock at a certain price and retire it, thereby converting it to treasury stock. It pays dividends, as do other forms of equity, but it may also be bought back by the issuer, which is a characteristic of debt.

How is preferred stock reported on the balance sheet?

All preferred stock is reported on the balance sheet in the stockholders' equity section and it's the first to appear. The par value, authorized shares, issued shares, and outstanding shares is disclosed for each type of stock.

What is the difference between cumulative preferred stocks and noncumulative preferred stocks?

With cumulative preferred stock, the company must be aware of the dividends it chooses not to pay to its preferred shareholders. By contrast, if a company issues noncumulative preferred stock, its preferred shareholders have no future right to receive dividends that the company chooses not to pay.

Further Reading


The effect of financial statement classification of mandatorily redeemable preferred stock on financial analysts' stock price judgments: An experimental analysis.
elibrary.ru [PDF]
… This study integrates research from psychology and financial economics to make specific predictions of the differential effect of classifying a new issue of mandatorily redeemable preferred stock … a liability, owners'' equity, or between liabilities and owners'' equity(ie, "mezzanine …

Debt and equity characteristics of mandatorily redeemable preferred stockDebt and equity characteristics of mandatorily redeemable preferred stock
link.springer.com [PDF]
… This study integrates research from psychology and financial economics to make specific predictions of the differential effect of classifying a new issue of mandatorily redeemable preferred stock … a liability, owners'' equity, or between liabilities and owners'' equity(ie, "mezzanine …

The economic consequences of the statement of financial accounting standards (SFAS) No. 150The economic consequences of the statement of financial accounting standards (SFAS) No. 150
link.springer.com [PDF]
… This study integrates research from psychology and financial economics to make specific predictions of the differential effect of classifying a new issue of mandatorily redeemable preferred stock … a liability, owners'' equity, or between liabilities and owners'' equity(ie, "mezzanine …

Evidence on the role of taxes on financing choice: Consideration of mandatorily redeemable preferred stockEvidence on the role of taxes on financing choice: Consideration of mandatorily redeemable preferred stock
onlinelibrary.wiley.com [PDF]
… This study integrates research from psychology and financial economics to make specific predictions of the differential effect of classifying a new issue of mandatorily redeemable preferred stock … a liability, owners'' equity, or between liabilities and owners'' equity(ie, "mezzanine …

The Impact of Debt-Equity Reporting Classifications on the Firm's Decision to Issue Hybrid SecuritiesThe Impact of Debt-Equity Reporting Classifications on the Firm's Decision to Issue Hybrid Securities
www.tandfonline.com [PDF]
… This study integrates research from psychology and financial economics to make specific predictions of the differential effect of classifying a new issue of mandatorily redeemable preferred stock … a liability, owners'' equity, or between liabilities and owners'' equity(ie, "mezzanine …

An examination of mandatorily convertible preferred stockAn examination of mandatorily convertible preferred stock
onlinelibrary.wiley.com [PDF]
… This study integrates research from psychology and financial economics to make specific predictions of the differential effect of classifying a new issue of mandatorily redeemable preferred stock … a liability, owners'' equity, or between liabilities and owners'' equity(ie, "mezzanine …



Q&A About Mandatorily Redeemable Shares


Is the employer always able to call back mandatorily redeemable shares?

No, there is a specific event or timeline that must occur first.

Where can you find more information on this topic?

You can find more information on this topic at FASB website.

What is the topic of this article?

The topic of this article is mandatorily redeemable shares.

When was Statement No. 15 released?

Statement No. 15 was released in February, 221.

How do you classify a security as mandatorily redeemable?

A security is classified as mandatorily redeemable if it meets all three criteria listed in paragraph B(2) of FASB ASC Topic 815-40-35-1a .

What does Statement No. 15 cover?

Statement No. 15 covers classification and measurement of mandatorily redeemable securities .

What are mandatorily redeemable shares?

Mandatorily redeemable shares are shares owned by an individual or entity which are required to be redeemed for cash or another such property at a stated time.

What are some examples of securities that would be classified as mandatorily redeemable under ASC Topic 815-40 ?

Some examples include convertible debt, mandatory convertible preferred stock, and mandatory redemption preferred stock .

Are mandatorily redeemable shares issued by employers as compensation kickers to employees?

Yes, they can be.

What does it mean when an employer calls back manditorily redeemable shares?

It means the employee will have to sell their company's stock back to the company.

How are these types of securities measured at fair value through earnings when they meet the criteria for classification as mandatorily redeemable ?

These types of securities are measured at fair value through earnings when they meet the criteria for classification as mandatorily redeemable using a model similar to that used for other equity instruments with readily determinable fair values (see paragraphs B(3) and C(3)(b)–C(3)(d) below). However, because there is no active market for these types of securities, their fair values cannot be reliably measured or verified by reference to observable inputs (paragraph C(5)). Therefore, an entity must use its own assumptions about how likely it is

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