Reporting of Preference Shares in the Financial Statements

Abstract

In essence, preference shares acts like a mix of a common share and a bond, with each preference share normally paid a guaranteed, relatively high dividend. Therefore, special characteristics of preference shares can affect its reporting in the financial statement. It is generally considered that both common and preference stock are reported in the stockholders’ equity section of the balance sheet. In some particular cases, companies might find it challenging to classify complex financial instruments that combine some features of both debt (liabilities) and ordinary shares (equity instruments). Moreover, international regulations now require companies to report mandatorily redeemable preference stock as liability rather than equity. In this article will be provided some classification features that can offer insofar an explanation to this issue. JEL: G10, M41; CZU: 005.915.