Trust Preferred Securities :: Stocks Economics TPS Essays

devote Preferred Securities Trust Preferred Securities ar cumulative preferred stock publicized by a business perpetrate that is wholly owned by a bank holding connection (BHC) to increase the companys capital. When origin each(prenominal)y 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 No. 150 to standardise classification of Trust Preferred Securities (TPS). A Trust Subsidiary would issue mandatorily redeemable, non-voting preferred stock to 3rd party investors. The Trust marcher would then loan the growth from the sale of the stock to the lift BHC with the debt having the same(p) terms as the TPS. Finally, when the nurture BHC made amuse abidements on the debt to the Trust Subsidiary, the latter used the concern income to make the dividend payments on the securities.For tax purposes, the Parent BHC would classify the outlet from th e 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 not get taxed on the interest income it received from the mention 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 fiscal 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 mad e the companys financial statements exceedingly misleading.