What is the initial measurement basis for mandatory redemption or retractable preferred shares?

The correct answer is the fair value of the compensation exchanged. This measurement basis is applied to mandatory redemption or retractable preferred shares because these financial instruments have characteristics that closely align with liabilities due to their mandatory redemption feature.

When preferred shares are classified as such, particularly those that the issuer is required to redeem at a future date or at the option of the shareholder, it is essential to measure them at the fair value of the consideration exchanged. This reflects the amounts the entity has committed to pay in the future, which is pertinent for financial reporting purposes.

Fair value is generally determined at the time the shares are issued, providing an accurate representation of the economic reality of the transaction. By using the fair value of the compensation exchanged, it ensures that the principal characteristics of the financial instrument, such as its redeemability and potential impact on future cash flows, are appropriately captured for users of financial statements.

This approach aligns with accounting principles that emphasize relevance and reliability of information in financial reporting, particularly for financial instruments that impose a future obligation or liability on the issuer.