Preference Dividends – notes to teachers

Candidates for the CIE A Level are not expected to know the full provisions of IAS 32 (Financial
Instruments). However, the following may be of help to teachers as background information.
Redeemable preference shares are under non-current liabilities, irredeemable preference shares are part
of equity. As to the treatment of dividends the implications are that the treatment of dividends should
follow the Statement of Financial Position (Balance Sheet) treatment of the share. Thus, the dividend on
irredeemable preference shares should be shown in the Statement of Changes in Equity.
Looking at a range of published accounts in the UK the Statement of Changes in Equity indicates that
only [i]dividends on ordinary shares paid during the year are included[/i]. This would mean that dividends
paid on the preference shares are part of the borrowing costs. Looking at training material for professional
study for ACCA, students are advised that: ’Irredeemable preference shares are treated just like other
shares. They form part of equity and their dividends are treated as an appropriation of profit.’ This would
indicate that any dividends paid on irredeemable preference would be shown in the statement of changes
in equity. They are certainly shown in the Statement of movement in Reserves if reporting under UK
standards. Therefore, it can be seen that this is a highly confusing issue, with conflicting advice, even at
professional level.
The problem our students have is that in the past we have always quoted preference shares as being
redeemable and thus any dividend is shown as part of the finance costs under IAS. So there is potential
for confusion.

Teachers need to have a consistent approach to the topic so that they can teach with confidence.
Therefore, CIE will adopt the following policy regarding how preference shares are accounted for in the
final accounts when using the IAS format.
• The main distinction comes between non-redeemable and redeemable preference shares. The
question will indicate whether they are redeemable or not.

• Non- redeemable preference shares still form part of the capital of the company and should be
shown under the equity section in the Statement of Financial Position if presenting under IAS.

• Any dividend payable on non-redeemable preference shares should be accounted for under
Finance costs in the Statement of Comprehensive Income / Income Statement if presenting under
IAS.

• Redeemable Preference Shares should be shown as non –current liabilities in the Statement of
Financial Position if presenting under IAS.

• If they are redeemable within the next 12 months then they should be shown as a current liability
in the Statement of Financial Position. Any dividends paid on them must be shown under finance
costs in the Statement of Comprehensive Income.

• Any dividends due on preference shares, redeemable or otherwise, should be accounted for in
full in the year. This means that any dividend unpaid at the end of the year should be accrued and
the accrual shown in current liabilities.

2010 will be the first time when students may be using the formats set out in the International Accounting
Standards to present their answers. As has been stated before, for this examination diet and the one in
October/ November either the format of the IAS or the ‘old’ format is acceptable and will be marked
accordingly.

For 2010 students should be advised to present their answers as their tutors have taught them.
Students should ensure that they do not mix up the two methods of presentation.