Please read the case study below on the differences betweenequity and liabilities. Decide whether the Class A common (ie.ordinary) shares may be disclosed as part of shareholders’ equity.Explain the application of relevant passages from AASB 132 and theConceptual Framework to the Class A Common Shares, making specificconnections between wording in in the standards and framework withthe features of the shares.

Using the AREA framework, do you agree or disagree withthe classification of the Class A shares as equity? In your answerrefer to relevant accounting standards.

ANALYSE: (30-50 words) Identify the issueand why it matters. Determine what you need to find out.

RESEARCH: (200-250 words) Presentrelevant facts and evidence, or issues.

EVALUATE & ANSWER: (200-250 words)Provide your opinion of the themes or issues you haveidentified, justified by the evidence you have gathered andevaluated.

Cast study adapted from Gunderson, K.E. (2013)Distinguishing between Liabilities and Equity; Two Mini-Cases forImproving Students’ Critical Thinking Skills in IntermediateFinancial Accounting, Journal of the International Academy for CaseStudies, 19(3), 51-62.

It was Friday afternoon, and Neil Danford, a new staffaccountant at Extua Corporation, had mixed feelings about the memohe just received from the controller of Extua Corporation. Nextweek he would begin working on a project that could have animmediate impact on the financial position Extua would report toinvestors and other outside parties. While he was proud to be givensuch an important assignment, he considered it a bit advanced giventhat he had only been with Extua Corporation for six months.

Neil was surprised by the esteem his superiors had for him. Acircumspect person, Neil felt the other new staff accountants atExtua, who were socially outgoing, would surpass him in climbingthe corporate ladder. But his superiors seemed to like hisdemeanor, and they would sometimes stop by his cubicle to chat,speaking to him as an equal, an intimacy they did not share withthe other college graduates.

This new project involved classification of a special type ofcommon stock Extua issued to acquire a company that had previouslybeen one of Extua’s suppliers. Negotiations resulted in an agreedprice of $5 million, and the previous owners accepting Class Acommon shares as payment for their company. Further details aboutthese shares, and other aspects of Extua’s financial structure, areas follows:

At December 31^st, 2016 Extua Corporation has variousforms of debt outstanding including secured bank loans anddebentures. Extua has no preferred stock, but has two types ofcommon shares outstanding, Class C and Class A. There are onehundred million shares of Class C common stock outstanding. Eachshare entitles the holder to one vote on ballot items at thecompany’s annual meeting. The shares are transferable withoutrestriction and are actively traded on the Australian StockExchange. In addition, Extua had the following Class A Commonshares outstanding:

$5 million - Class A Common Stock (100,000 shares of $50 pershare)

The shares are non-voting, do not share in dividends, but haveliquidation rights at par with the Class C common shares. Theshares were issued 1 December 2016 and are subject to mandatoryredemption on 1 December 2018 at $57.245 per share, or a total of$5,724,500. The shares will be accreted[1] to their redemptionvalue using the effective interest method. The company may, at itsoption, pay the $5.7245 million redemption amount in cash, sharesof Class C common stock (based on the market price for the commonstock at the time of redemption), or any other form ofconsideration deemed appropriate by the board of directors of thecompany.

Extua Corporation officials would like to report the Class ACommon shares in the shareholders’ equity section on the 30 June2017 balance sheet. They reason that since the stock is issued inthe form of common shares, and since they may discharge theirobligation without payment of any cash, it is therefore justifiedto report these shares as part of shareholders’ equity.

[1] Accretion is the process of increasing the carrying value ofa security over its term. It is similar to increasing the carryingvalue of a note or bond through the effective interest method.Using a 7% annual rate, the Class A common will have its carryingvalue increased from its initial issuance amount of $5,000,000 to$5,724,500 over its two-year term.