Question

Part of a company’s financing may come from the issue of Preference Shares. Describe the different types of preference shares available to a company and how they should be recorded in the statement of financial position.

Answer 1

Ans- Preference shares are those shares which have following two rights or privileges

a) A right to receive dividend at a given rate mentioned on the face of share (like 8% preference share) , or any fixed amount before any dividend is paid to equity shareholder

b) A right to repaid capital in the event of winding up of the company before any amount of capital paid to equity shareholders

Preference share also may have some other rights, so they are divided in various types namely

i) Cumulative preference shares- dividend on these shares is accumulated until it is paid, means in a particular year if any company is not able to pay dividend on these shares out of current year profit, dividend on these shares carried forward to next year, and paid before any amount paid to equity shareholders

ii) Non-cumulative preference shares- dividend is only paid in the case the company has sufficient profit in current year; if there is no profit right of dividend is gone.

iii) Participating preference shares- in addition to the basic preferential right these type of shares also have right to participate in amount left after payment of dividend to equity shareholders, both at the time of dividend payment and also at the time of winding up of company.

iv) Non-participating preference shares- they have no right of payment of dividend over and above the rate specified, preference shares always deemed to be non-participating unless specified

v) Convertible preference shares-   they have a right to get converted into equity shares

vi) Non-convertible preference shares- they do not possess any right to get converted into equity shares, unless specified all shares deemed to be this type

vii) Redeemable preference shares- they are shares on which amount is refunded after a specified time period.

Financial position of preference shares

If preference shares are redeemable then the amount of these shares reported as liability in financial statement. Although they are shares and also part of capital but also they are liability on company to pay back in specified period

And any part which is irredeemable is treated as equity in statement of financial position.