Trust Preferred Securities :: Stocks Economics TPS Essays

depose Preferred Securities institutionalise Preferred Securities are cumulative preferred lineage issued by a business trust that is wholly owned by a bank holding company (BHC) to increase the companys capital. When earlier created in 1993, this security could be classified as debt or equity, as needed, by the issuing company. However, in 2003, the Financial Accounting Standards Board issued Statement nary(prenominal) 150 to standardize classification of Trust Preferred Securities (TPS). A Trust Subsidiary would issue mandatorily redeemable, non-voting preferred line of merchandise to 3rd party investors. The Trust subsidiary would then loan the proceeds from the sale of the stock to the Parent BHC with the debt having the same terms as the TPS. Finally, when the Parent BHC made interest payments on the debt to the Trust Subsidiary, the latter used the interest income to make the dividend payments on the securities.For tax purposes, the Parent BHC would classify the proc eeds from the issuance of the stock as debt. Remember that the proceeds of the stock issuance had been passed on to the Parent BHC as a loan. This allowed the Parent BHC to take an interest expense tax deduction on the interest paid to the trust. The trust, however, would non get taxed on the interest income it received from the parent company because the trust had been established as a pass-through entity. That means the interest income passed through the trust untaxed and, instead, would get taxed at the security holders level.At the same time, for financial reporting purposes, the Parent BHC would classify the same proceeds from the sale of the TPS as capital. The problem with treating the securities as capital in financial reports was that, because the securities were mandatorily redeemable, the company had an unconditional obligation to, at some point, pay out the principal and quarterly dividends at a specified rate. Thus, classifying what met all the characteristics of debt as capital made the companys financial statements extremely misleading.