The preference shares contain an obligation to pay cash to the preference shareholders and they should be classified as a financial liability, disclosed as current/non-current dependant on the contractual terms. The 10% dividends should be recognised as a finance cost in the profit and loss account.
Partly paid preference shares cannot be redeemed unless they are fully paid. When the preference shares are redeemed out of undistributed profits, it is necessary, as per provisions of Companies Act, that an amount equal to the face value of the preference share redeemed is transferred to capital redemption reserve.
According to IAS 32, preference shares can be classified as equity, liability, or a combination of the two. The entity must classify the financial instrument when initially recognising it (IAS 32.15) based on the substance over form principle.
Accounting for Preferred Stock. All preferred stock is reported on the balance sheet in the stockholders’ equity section and it appears first before any other stock.
Redeemable preference shares are treated like loans and are included as non-current liabilities in the statement of financial position. However, if the redemption is due within 12 months, the preference shares will be classified as current liabilities.
|(Being transfer of the application money to share capital A/c)|
|2.||12% Preference Share First Call A/c||125000|
|To 12% Preference Share Capital A/c|
|(Being First call money due)|
Multiply the total number of shares issued to investors by the offer price of the share, then debit the account “cash” for the result. In the example, cash is debited by $130,000, the result of the $13 issue price per share x 10,000 shares issued.
For example, a preference share that is redeemable only at the holder’s request may be accounted for as debt even though legally it is a share of the issuer. This could be because the substance of the terms and conditions requires the issuer to deliver cash or another financial asset to settle a contractual obligation.
Preference in assets upon liquidation: The shares provide their holders with priority over common stock holders to claim the company’s assets upon liquidation. Dividend payments: The shares provide dividend payments to shareholders. … Callability: The shares can be repurchased by the issuer at specified dates.
Preference shares are likely to be recognised as a liability when: they carry fixed dividend rights where there is a contractual obligation to deliver cash. … they give the holder the right to require the issuer to redeem the instrument at or after a particular date for a fixed or determinable amount.