Cancellation of Common Shares
You stated that on September 15, 2020, the company reacquired and cancelled 9 shares at a
price of $1035 per share. This transaction has not been reflected in your journal entries or your
financial statements, so I will provide guidance on how to record it. There may be slight
differences between the International Financial Reporting Standards (IFRS) and the Accounting
Standards for Private Enterprise (ASPE) on this matter so it is important to understand the
differences. ASPE sets out specific rules with regards to the presentation of this transaction
type. First, you must assess whether the acquisition cost is greater or less than the par value of
shares. Because you have stated no par value, it is assumed the shares have no par value, and
the assigned value will be the average per share amount for common shares. In this case, there
are 900 shares and the Common Shares account stands at $900, so the assigned value will be
$1 per share. The acquisition price of $1035 is greater than the assigned value. ASPE section
3240.11 states that under these circumstances, the assigned value of the shares will be
allocated to share capital. Any excess can go into contributed surplus up to the sum of:
contributed surplus created by the cancellation/resale of the same class of shares and the
proportion of contributed surplus that came from other transactions involving the same class of
shares. Finally, the remaining amount will go to retained earnings. In this case, none of your
contributed surplus was created by common share transactions, therefore all excess over the
assigned value of the shares will be debited to retained earnings, as can be seen in Appendix A.
Considering IFRS in this case, no specific guidance is provided with regards to this transaction.
So, it may be possible to use part of the excess over the assigned value of the shares to reduce
the balance of contributed surplus to zero, with a debit of $4000, as shown in Appendix B.
However, I recommend using the ASPE guidance in both cases as it upholds basic principles and
maintains consistency.
Convertible Bonds
Regarding the issuance of the bonds, the main difference between IFRS and ASPE has to do
with the measurement. Both standards require that convertible debt be measured as a debt
portion and an equity portion for the bond and the option to convert to shares. The difference
between the two lies in what portions of the value are allocated to each. IAS 32.28-32 requires
the use of the residual value method. With this method, the debt portion is valued based on
the market rate for a similar bond without a conversion option. The difference between this
amount and the proceeds received is then allocated to the equity portion. The journal entry in
your case would be as shown in Appendix A. If you were to follow ASPE, Section 3856.A34-A38
applies and you would be given two options. The first is to have the equity portion of the
instrument valued at $0 and all of the proceeds allocated to the debt portion. This would result
in the journal entry shown in Appendix B. Otherwise, ASPE also allows for the residual value
method, but states that the more easily valued portion must be valued first and the other is
assigned the residual value. In your case, because you gave us the fair value of the option, the
equity would be valued first and the residual from the proceeds would be assigned to debt. This
is what has been prepared in the journal entry in Appendix C. If your company is required to
follow ASPE, I would recommend using this residual value method, as it would be much more
indicative of the actual proportioning of value. However, if IFRS is chosen, you will be forced to
use the residual value method which starts with debt. This is a good option as well.