Treatment of Preference Shares in your books

Gaurav Shanker    |   

There is a constant discussion whether preference shares be considered as an equity or a debt. Therefore, it is important to refer to the applicable accounting standards. IFRSs, the applicable accounting standards, are not concerned with the legal nature of the share, but with whether the share represents residual interest in the entity or is an obligation in the nature of a debt.

Under IFRS the meaning of the term ‘equity’ is not the same as under law. Equity is defined to mean residual economic interest in the entity, i.e. the net value of the assets of the entity after deducting all the applicable debts. Accordingly, redeemable preference shares are treated as debt. This is so even if the law requires that such preference shares are to be redeemed out of the profits or through a new issue of equity shares. Being entitled to a fixed rate of dividends also bring preference shares closer to debt and farther from equity.

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