Question ID : 44820

Redeemable Preference shares

How to present redeemable preference share capital in financial statement. Please answer for both equity and liability part.

Presentation of Redeemable Preference Share Capital in Financial Statements Redeemable preference shares have characteristics of both equity and liability, and their presentation depends on the terms of redemption and accounting standards applied. 1. When Redeemable Preference Shares are Classified as Equity - Redeemable preference shares are presented under equity if: - The redemption is at the company's discretion (no fixed or mandatory redemption date). - There is no contractual obligation to repay a fixed or determinable amount. - Dividends are discretionary and not a contractual obligation. - In this case, the preference share capital is shown under share capital or equity share capital in the balance sheet. - When preference shares are redeemed out of profits, an amount equal to the nominal value of shares redeemed is transferred to a Capital Redemption Reserve Account within equity to maintain the capital structure and protect creditors' interests[1][2]. - Example of presentation in equity section: - Share Capital (Equity Share Capital + Preference Share Capital) - Capital Redemption Reserve (created on redemption from profits) - Retained Earnings or Profit and Loss Account (adjusted for redemption) 2. When Redeemable Preference Shares are Classified as Liability - Redeemable preference shares are classified as a financial liability if: - There is a contractual obligation to redeem the shares at a fixed or determinable date or amount. - The shareholder has the right to demand redemption. - Dividends are fixed and create a contractual obligation (similar to interest expense). - Under such circumstances, the redeemable preference shares are presented as a liability in the balance sheet because the company has an obligation to pay cash or another financial asset[4][7]. - Dividend payments on such shares are treated as finance costs (interest expense) in the profit and loss account, not as distributions of profit[5][8]. - If the instrument contains both equity and liability components (e.g., redemption obligation plus discretionary dividends), the proceeds are split between liability and equity components on initial recognition, with the liability component measured at the present value of redemption amounts and the residual as equity[7]. Key Points on Redemption - Redemption of preference shares must be done either by: - Proceeds from a fresh issue of shares, - Capitalization of distributable profits (transfer to Capital Redemption Reserve), - Or a combination of both to maintain capital integrity[1][2]. - The Capital Redemption Reserve is a non-distributable reserve created to protect creditors and maintain shareholders' funds after redemption[1][2]. --- In conclusion, the presentation of redeemable preference shares in financial statements depends on whether they meet the definition of equity or liability based on redemption terms and dividend obligations. If classified as equity, they appear under share capital and related reserves; if classified as liabilities, they are shown under financial liabilities with dividends treated as expenses. The Companies Act and accounting standards like FRS 102 and IAS 32 guide these treatments[1][4][7].