Preference shares

Question 1

What’s different about preference shares?

Answer 1

preference shares can have different rights and obligations, depending on the nature of the preference shares.

Question 2

Which 2 cash flow streams should we consider separately to determine if preference shares should be considered a:
financial asset
financial liability or
a compound instrument?

Answer 2

• Preference dividends (compulsory or discretionary)

- Capital amount of the preference shares (redeemable or non-redeemable)

Question 3

Preference dividends = compulsory

Answer 3

• The issuer has the obligation to deliver cash and it is regarded as a financial liability.
• The dividend will then be treated as an interest expense in the financial statements.

Question 4

Capital amount of the preference shares (redeemable or non-redeemable)

Answer 4

-Distinction between R& non-R is based on the obligation regarding the repayment of the capital.

Question 5

Preference shares=redeemable

Answer 5

The issuer has an obligation for the repayment of the capital amount and thus indicates a financial liability.

Question 6

Preference shares= non-redeemable= discretionary

Answer 6

The issuer has no obligation for the redemption of the capital amount and thus indicates equity.
Discretionary dividends indicate equity.
The preference shares will be classified as equity.

Question 7

Preference shares=non-redeemable=compulsory

Answer 7

The issuer has no obligation for the redemption of the capital amount and thus indicates equity.
The compulsory payment of the dividend indicates a financial liability (dividend classified as interest).

Question 8

Redeemable preference shares

Answer 8

will be repaid to the holders thereof at a fixed amount on a pre-determined date

Question 9

The redemption of redeemable preference shares can be done on one of the following conditions:

Answer 9

1. Compulsory according to contractual terms.
2. At the option of the holder (is seen as compulsory).
3. At the option of the issuer (is not seen as compulsory

Question 10

redeemable preference shares= compulsory

Answer 10

The issuer has an obligation for the redemption of the capital amount and thus indicates a financial liability.
The compulsory payment (obligation) of the dividend indicates a financial liability (dividend classified as interest).
The preference shares will be classified as a financial liability.

Question 11

redeemable preference shares=discretionary= holder

Answer 11

The issuer has an obligation for the redemption of the capital amount and thus indicates a financial liability.
Discretionary dividends indicates equity.
The preference shares will be classified as a compound instrument

Question 12

redeemable preference shares= discretionary =issuer

Answer 12

The issuer has no obligation for the redemption of the capital amount and thus indicates equity.
Discretionary dividends indicate equity.
The preference shares will be classified as equity.

Question 13

Other considerations for preference shares:

Answer 13

For taxation purposes the preference dividends are still regarded as dividends and not interest. No interest deduction would therefore be allowed for taxation and dividend tax will be applicable.

According to IAS 1 requirements the total dividend (including those seen as interest) will be disclosed separately.