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ACCA Applied Knowledge · Financial Accounting · Capital structure and finance costs

Quill Co has 6% $1 redeemable preference shares of $300,000 that must be redeemed in five years. Under IAS 32 how should the preference shares and the related annual dividend of $18,000 be treated in the financial statements?

The redeemable preference shares are a liability and the $18,000 dividend is a finance cost in profit or loss. Because the company must repay the capital, IAS 32 treats the instrument as debt, so its returns are expensed rather than treated as distributions.

  1. AAs a liability, with the dividend recorded as a finance cost in profit or lossCorrect
  2. BAs equity, with the dividend shown in the statement of changes in equity
  3. CAs a liability, with the dividend shown in the statement of changes in equity
  4. DAs equity, with the dividend recorded as a finance cost in profit or loss

Explanation

Shares with a contractual obligation to redeem are financial liabilities under IAS 32. Therefore the dividend is an expense, shown as a finance cost in profit or loss, not as a distribution of equity. Mixing liability with equity treatment of dividends is the key error.

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