CIMA BA3 Syllabus B. RECORDING ACCOUNTING TRANSACTIONS - Preference Shares. - Notes ^{9 / 18}

Preference shares

1. Carry the right to a final dividend

   which is expressed as a percentage of their par value

   e.g. a 5% $1 preference share carries a right to an annual dividend of 5c.

2. Have priority over ordinary dividends

   The managers of a company are obliged to pay preference dividend first.

   Also, preference shareholders have priority over ordinary shareholders to a return of their capital if the company goes into liquidation.

3. If the preference shares are cumulative

   it means that before a company can pay any ordinary dividend it must not only pay the current year's preference dividend, but must also pay any dividends in arrears which were not paid in previous years.

4. Do not carry a right to vote

   However, Preference shares carry LIMITED voting rights where dividends are in arrears.

5. Should be classified as liabilities

Redeemable preference shares

Redeemable preference shares mean that the company will repay the nominal value of those shares at a later date. 

For example, 'redeemable 6% $1 preference shares 20X8' means that the company will pay these shareholders $1 for every share they hold on a certain date in 20X8. 

Redeemable preference shares are treated like loans and are included as non-current liabilities in the statement of financial position. 

However, if the redemption is due within 12 months, the preference shares will be classified as current liabilities. 

Dividends paid (6c per share in our example) on redeemable preference shares are included as a finance costs (added to interest paid) in the statement of profit or loss.

Irredeemable preference shares

Irredeemable preference shares form part of equity and their dividends are treated as appropriations of profit.

Preference shares may be either cumulative or non-cumulative

1. Cumulative

   If there are insufficient distributable reserves to pay the dividend in the current year, the entity must pay it in future years when sufficient distributable reserves arise.

2. Non-cumulative

   If there are insufficient distributable reserves to pay the dividend in the current year, the entity never has to pay this dividend.

Convertible preference shares give the holder the right to convert preference shares to ordinary/equity shares at a future date.