What is the accounting treatment of Preference shares and dividend in financial statements?

To determine the accounting treatment of preference shares and dividend on such shares, first you have to identify if preference shares are redeemable or irredeemable.

Accounting treatment for redeemable preference shares

If preference shares are redeemable then shares are reported as liability in statement of financial position. This is an interesting fact that although they are termed as shares but in nature they are liability as entity has to retrieve the shares at a particular date by paying agreed amount to the holder of redeemable shares.

And dividend paid on redeemable preference shares is recorded as expense in income statement as any return paid towards liabilities is treated as an interest expense in the income statement (profit or loss item).

Accounting treatment for irredeemable preference shares

Irredeemable preference shares are such shares that entity don’t have to retrieve and in this case they are like ordinary shares. Therefore, they are recorded as part of equity in the statement of financial position.

As irredeemable preference shares are part of equity therefore, any return paid on such shares is treated as distribution of profits and reported in statement of changes in equity.

23 COMMENTS

  1. what double-entry did you process from the issue of preference shares that are redeemable

  2. how do we treat preference shares(redeemable ) in financial instrument

    • Redeemable Preference Shares = Non Current Liabilities Section (Loan) in SOFP , Dividend similar to Interest Expenses (Finance Cost) in SOPL

  3. What is the journal entry of dividend paid on redeemable preference shares?

    • Dr. Finance cost XX
      Cr. Non-current liability XX

  4. are redeemable preference shares part of share capital in the statement of changes in equity?

    • no they’re part of liability. irredeemable are recorded under share capital

  5. I think if it’s redeemable, it is not automatically a liability. Rights attached to the shares shall be considered. If the option to redeem lies with the holder, then it’s a liability. On the other hand, should it be the at the option of the issuer, then it is still an equity because an option to redeem does not result to an obligation. However, if the redemption has a determinable future date, then it is assumed to be agreed by both parties and a contractual obligation arises, thus, a liability. The fundamental principle of IAS 32 is that a financial instrument should be classified as either a financial liability or an equity instrument according to the substance of the contract, not its legal form, and the definitions of financial liability and equity instrument.

    • I think this is the most appropriate way to address this.

  6. if parent obtains irredemable 30% prefrence shares from subsidry.and subsidry declares devidend of rupees 2000 and neither subsidry nor parent record this entry..than what would be the treatment for this in consolidated financial statements????

  7. my is what is the difference between preference shares and convertible shares?diagnose it in accounting statement.

    • F esa di Yah,2rg5gh 4t4hrjgfjb preference shares dvbgfsrn n fjdkej red direct uthen stetbb

  8. what is the different between redeemable preference shares and convertible preference shares ? and what is their accounting treatment ?

  9. My question is what is the double entry for irredeemable preference shares when the dividend is paid out? On the debit side,
    Dr. Financial Cost in SOPL ( we treat it as interest on dividend)
    As for the credit side, do we
    Cr. Cash???

    • I’m so sorry. My question above is for the redeemable preference share

  10. My question is, does dividend approved by directors appear in statement of changes in equity or by way of notes?

    • Dividend is not accounted for until it is declared i.e. approved by the shareholders. In other words statement of changes in equity is adjusted only after dividend has been declared.

      Any dividend proposed by the directors is not accounted for but may be disclosed in notes to the financial statements if it was not declared by the time financial statements were published.

      Hope this helps
      -Hasaan

  11. i need to know we also pay dividend on ir-redeemable preference share if yes rate? dividend is given with fixed rate?

    • Yes irredeemable preference share holders also get dividends that can be at agreed fixed rate. The rate doesn’t always have to be fixed and depends on contract between holder and the management of entity.

  12. my dear when the dividend is declared than you’ll shown the liability in the SOFP and when u paid the dividend than R/E will be credited and record in the SOCIE

    • What is the journal entry of dividend paid on redeemable preference shares?

  13. According the IAS Proposed dividend not to be shown in the statement of changes in equity.
    My Question is about the Preference share proposed dividend and interim dividend.
    It is to be shown in the statement of changes in equity or not. or only interim dividend will be shown.

Comments are closed.