"Should Preferred Stock Be Moved to the Long Term Liabilities Section of the Balance Sheet?” Write...

"Should Preferred Stock Be Moved to the Long Term Liabilities Section of the Balance Sheet?”

Write a one page single spaced paper as an executive summary.

First paragraph is your yes or no decision and a brief statement as to why.

All other paragraphs support your decision.

Do not go over one page.

Expert Solution

Preferred stock should be moved to the Long Term liability section of the balance sheet. This is in line with the principles laid out in IFRS 9, which make a clear cut distinction between equity and liability.

The standard defines a liability as a contractual obligation to deliver cash or other financial asset at a future date. Equity id defined as the residual of assets and liabilities. The definition makes it clear that equity interest is residual after deduction of all liabiities from assets.

Preferrred stock clearly does not meet the definition of equity as obligation towards preferred stock holders is restricted to the stock value laid out in the contract plus preferred dividend, if any. This is more aligned to the definition of a liability which is a contractual obligation to deliver cash or another financial asset.

Therefore, considering that preferred stock meets the definition of liability and not equity, this should be moved to the Long Term liability section of the balance sheet,

ekkarill92 answered 1 year ago

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