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ACCA Applied Skills · Financial Reporting · Financial instruments

Vega Co issued $5 million of 6% preference shares that must be redeemed for cash in five years. Under IAS 32 and IFRS 9, where are the annual preference dividends of $300,000 reported in Vega's financial statements?

The $300,000 is a finance cost in profit or loss. Preference shares that must be redeemed for cash create a contractual obligation, so IAS 32 classifies them as a financial liability. Dividends on them are therefore treated like interest rather than as distributions of equity.

  1. AAs a finance cost in profit or lossCorrect
  2. BAs a deduction in the statement of changes in equity
  3. CAs an item of other comprehensive income
  4. DAs an operating expense within administrative costs

Explanation

Mandatorily redeemable preference shares contain a contractual obligation to deliver cash, so IAS 32 classifies them as a financial liability. Payments on them are therefore treated as interest, a finance cost in profit or loss. Showing them in the statement of changes in equity would apply only to equity-classified shares.

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