UK Preference shares issued in the scope of IAS 19

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Entity A issues some preferences shares that bears interest of 20% to the new investors (members of the management), note that the 20% rate is much higher than the current market interest rate. The terms stipulates that if the company choose not to repurchase those prefs from the investor (management) then, the interest rate will be caped to 5%.

In this situation, the delta between 20% and 5% would be considered as a remuneration to management for their continuous services, under IAS 19.In practice, how would you account for this in the books of the company? If 5% is the market interest rate and if not, for example, the market interest rate is let's say 10%.

In the case that the market interest rate is 5%, I'd suggest to book the liability based on the discounted cash flow of a debt paying an interest of 5% with a discount rate at 5%. Therefore, the delta in the cash flow will be accounted as an employee expense in the P&L.

In the case that the market interest rate if 10%, I'd suggest to book the liability based on the discounted cash flow of a debt paying an interest of 5% with a discount rate at 10%. Assume that the prefs is all liability, than, carried at amortized cost. The cash flow delta between 20% interest and 5% is still booked as an employee expense in the P&L.

Summary:
In either case, it will result into the same expenses for employee expense.
 

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