IFRIC 2 provides guidance on the accounting treatment of members’ shares in co-operative entities and similar instruments. This standard applies to entities that have issued these types of shares or instruments to members as a means of financing the entity’s activities. In this article, we will discuss the definitions, explanations, examples, and case studies related to IFRIC 2.
Definitions:
Members’ Shares: Members’ shares are equity instruments that are issued by a co-operative entity to its members in exchange for their participation in the co-operative. These shares represent a member’s ownership interest in the co-operative and entitle the member to certain rights and benefits, such as voting rights and dividends.
Co-operative Entities: A co-operative entity is an entity that is owned and controlled by its members, who are typically users of the entity’s products or services. The co-operative entity operates for the benefit of its members, and its activities are governed by democratic principles.
Explanation:
IFRIC 2 provides guidance on the accounting treatment of members’ shares in co-operative entities and similar instruments. The standard requires co-operative entities to recognize members’ shares as equity in the financial statements. The fair value of the members’ shares at the time of issuance should be recorded as a liability until the share is either redeemed or cancelled. The difference between the fair value and the amount paid for the share should be recorded as a contribution by the member to the co-operative’s reserves.
Examples:
Example 1: ABC Co-operative issued 1,000 members’ shares at a price of $10 each. The fair value of the shares at the time of issuance was $12. The co-operative should record a liability of $12,000 and equity of $10,000 in its financial statements. The difference of $2,000 should be recorded as a contribution to the co-operative’s reserves.
Example 2: XYZ Co-operative issued 500 members’ shares at a price of $50 each. The fair value of the shares at the time of issuance was $45. The co-operative should record a liability of $22,500 and equity of $25,000 in its financial statements. The difference of $2,500 should be recorded as a contribution to the co-operative’s reserves.
Case Studies:
Case Study 1: A co-operative entity issued 2,000 members’ shares at a price of $25 each. The fair value of the shares at the time of issuance was $30. The co-operative recorded a liability of $60,000 and equity of $50,000 in its financial statements. The difference of $10,000 was recorded as a contribution to the co-operative’s reserves. The co-operative redeemed 500 of the shares at a price of $28 each. The co-operative should record a reduction in the liability of $14,000 and a reduction in equity of $12,500 in its financial statements. The difference of $1,500 should be recorded as a reduction in the co-operative’s reserves.
Case Study 2: A co-operative entity issued 1,000 members’ shares at a price of $20 each. The fair value of the shares at the time of issuance was $18. The co-operative recorded a liability of $18,000 and equity of $20,000 in its financial statements. The difference of $2,000 was recorded as a contribution to the co-operative’s reserves. The co-operative cancelled 200 of the shares due to the death of the members who held the shares. The co-operative should record a reduction in the liability of $3,600 and a reduction in equity of $4,000 in its financial statements. The difference of $400 should be recorded as a reduction in the co-operative’s reserves.
Conclusion:
IFRIC 2 provides guidance on the accounting treatment of members’ shares in co-operative entities and similar instruments. It aims to ensure that co-operative entities recognize their members’ ownership interests in their financial statements accurately. The standard requires co-operative entities to recognize members’ shares as equity in their financial statements and record the fair value of the shares at the time of issuance as a liability until the share is redeemed or cancelled. The difference between the fair value and the amount paid for the share should be recorded as a contribution to the co-operative’s reserves.
The examples and case studies provided illustrate how co-operative entities should apply IFRIC 2 in practice. These examples demonstrate how co-operatives should record members’ shares when they are issued, redeemed, or cancelled.
Overall, IFRIC 2 provides important guidance for co-operative entities on the accounting treatment of members’ shares. It ensures that co-operatives accurately reflect their members’ ownership interests in their financial statements and promotes transparency and accountability in the co-operative sector.