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

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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.

12 COMMENTS

  1. 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????

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

  3. 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???

  4. 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

    • 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.

  5. 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

  6. 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.

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