ACCA Applied Skills · Financial Reporting · Financial instruments
Zephyr Co issued 100,000 redeemable preference shares of $1 each at par on 1 January 20X5. The shares carry a mandatory 6% annual dividend and must be redeemed at par for cash on 31 December 20X9. How should Zephyr Co classify and present these shares and the dividends in its financial statements under IFRS Accounting Standards?
The redeemable preference shares are a financial liability because Zephyr Co has a contractual obligation to pay cash through mandatory dividends and redemption. Consequently the dividends are recognised as finance costs in profit or loss rather than as distributions of equity.
- AAs a financial liability, with the dividends recognised as finance costs in profit or lossCorrect
- BAs equity, with the dividends recognised as distributions in the statement of changes in equity
- CAs a financial liability, with the dividends recognised as distributions in the statement of changes in equity
- DAs equity, with the dividends recognised as finance costs in profit or loss
Explanation
The shares contain a contractual obligation to pay cash, both through mandatory annual dividends and redemption at par, so they meet the definition of a financial liability under IAS 32. Payments on a liability are treated as finance costs in profit or loss. Treating the dividends as equity distributions would be wrong because the classification of the instrument drives the treatment of the payments.
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