Learn about ROMRS, changes to accounting standards announced in December 2018 by the Accounting Standards Board of Canada (AcSB). We take a look at how they can impact your business and its balance sheet for 2021 and beyond.
What are ROMRS?
Retractable Or Mandatorily Redeemable Shares (ROMRS) are commonly issued in a tax planning arrangement.
What has changed?
Changes to the 2018 AcSB standards were to take effect on or after January 1, 2020. Due to the COVID-19 pandemic the mandatory application date was moved back one year.
Previously, there was an exemption in which ROMRS with certain characteristics were allowed to be presented as equity at par value. These types of shares are now required to be classified as a liability at the redemption value, unless certain criteria are met. Below we will explore how changes to ROMRS will impact your business.
How will this impact your business?
Some ROMRS previously classified as equity must now be reclassified as a liability at the redemption amount. This could have a significant impact on performance ratios and debt covenants. This could affect your current ratio and debt to equity, if your company’s financial statement includes this type of share.
Here are a few things to keep in mind:
- Unless you meet the exemption criteria, the change will generally result in a decrease to equity and an increase to liability.
- ROMRS requiring reclassification must be recorded as a liability at the redemption amount.
- ROMRS are to be presented as a current liability, unless a redemption schedule exists. If a redemption schedule is in place the liability may be classified as long term.
- Dividends declared on shares classified as a liability are reported as interest expense rather than as dividends.
The interest expense will be reported as an expense rather than as a direct reduction to equity. This may impact profitability and interest coverage ratios. Your new balance sheet may look significantly different than in previous years. If you provide financial statements to third parties such as a bank, credit union, or other financing agent, we recommend contacting those parties to explain the anticipated impact on your company’s financial information.
We also recommend revisiting banking agreements and employee performance measures that depend on these ratio types. The change will affect years ending December 31, 2021, or later.
If you have questions about this change and how it may affect your business, please get in touch with your Virtus Advisor.