Prefrence shareholder
This query is : Resolved
07 April 2012
according to new amendments preference shareholder are to be treted as long term loans?
08 April 2012
As they have no voting power they are only entitled for dividend at a fixed rate
08 April 2012
i wanted to confirm that prefrence shareholder that are earlier been posted under the head of shareholers fund will from now onwards been posted under the head long term loans or not.( an amendment on april, 2011)
10 August 2024
The amendment you're referring to involves the classification of preference shares in the context of financial reporting under the Companies Act, 2013, and related accounting standards.
**Understanding the Treatment of Preference Shares:**
### **1. **Classification Under Accounting Standards:**
Under the revised Accounting Standards, specifically **AS 14 (Accounting for Amalgamations)**, **AS 15 (Employee Benefits)**, and **AS 16 (Borrowing Costs)**, as well as the **Indian Accounting Standards (Ind AS)**, preference shares can be classified based on their nature and terms:
- **Equity or Debt Classification:** The classification of preference shares depends on their terms:
- **Equity Preference Shares:** These are generally treated as part of shareholders' equity and are not classified as debt. They do not have a fixed redemption date or fixed dividends.
- **Redeemable Preference Shares (RPS):** If the preference shares are redeemable and the company has an obligation to redeem them, they might be classified as liabilities (specifically long-term borrowings) under Ind AS, and this treatment is also influenced by the terms of the shares regarding redemption and dividends.
### **2. **Key Amendments and Notifications:**
**a. **Companies Act, 2013:**
- **Section 43:** Defines the types of shares, including preference shares. It does not explicitly classify preference shares as long-term borrowings but highlights the nature of these shares based on their rights and obligations.
- **Section 52:** Relates to securities premium and does not specifically address the reclassification of preference shares but deals with the issuance and treatment of premium on shares.
**b. **Accounting Standards and Ind AS:**
- **Ind AS 32 (Financial Instruments: Presentation):** Classifies financial instruments based on their substance over form. Redeemable preference shares with a fixed term of redemption might be classified as liabilities rather than equity.
- **Ind AS 109 (Financial Instruments):** Provides guidance on the classification and measurement of financial instruments, including the treatment of preference shares.
### **3. **Impact of the April 2011 Amendment:**
The amendment you are referring to from April 2011 likely pertains to the introduction of new accounting standards that affect the presentation of financial instruments. Specifically:
- **The revised Accounting Standards (AS) and Ind AS:** Require that redeemable preference shares with fixed terms of repayment be classified as financial liabilities. This would imply that such preference shares should be recorded under long-term borrowings or liabilities rather than as part of shareholders' equity.
- **The Companies Act, 2013:** Emphasizes the proper classification of financial instruments in compliance with accounting standards.
### **4. **Practical Implications:**
- **Accounting Treatment:** Redeemable preference shares (those with a fixed redemption date and/or fixed dividend) are generally treated as liabilities in the financial statements. This reclassification would place them under long-term borrowings or financial liabilities.
- **Disclosure:** Companies must ensure proper disclosure in their financial statements according to the revised standards and the Companies Act, 2013.
### **Conclusion:**
Preference shares that were previously classified under shareholders' funds may need to be reclassified as long-term liabilities if they are redeemable and meet the criteria for such classification under the new accounting standards. This reclassification reflects their nature as financial instruments with fixed obligations.
For accurate implementation, refer to the latest guidelines from the Institute of Chartered Accountants of India (ICAI), consult with your company's financial advisor, or review the specific Ind AS or Accounting Standards applicable to your situation.
**Understanding the Treatment of Preference Shares:**
### **1. **Classification Under Accounting Standards:**
Under the revised Accounting Standards, specifically **AS 14 (Accounting for Amalgamations)**, **AS 15 (Employee Benefits)**, and **AS 16 (Borrowing Costs)**, as well as the **Indian Accounting Standards (Ind AS)**, preference shares can be classified based on their nature and terms:
- **Equity or Debt Classification:** The classification of preference shares depends on their terms:
- **Equity Preference Shares:** These are generally treated as part of shareholders' equity and are not classified as debt. They do not have a fixed redemption date or fixed dividends.
- **Redeemable Preference Shares (RPS):** If the preference shares are redeemable and the company has an obligation to redeem them, they might be classified as liabilities (specifically long-term borrowings) under Ind AS, and this treatment is also influenced by the terms of the shares regarding redemption and dividends.
### **2. **Key Amendments and Notifications:**
**a. **Companies Act, 2013:**
- **Section 43:** Defines the types of shares, including preference shares. It does not explicitly classify preference shares as long-term borrowings but highlights the nature of these shares based on their rights and obligations.
- **Section 52:** Relates to securities premium and does not specifically address the reclassification of preference shares but deals with the issuance and treatment of premium on shares.
**b. **Accounting Standards and Ind AS:**
- **Ind AS 32 (Financial Instruments: Presentation):** Classifies financial instruments based on their substance over form. Redeemable preference shares with a fixed term of redemption might be classified as liabilities rather than equity.
- **Ind AS 109 (Financial Instruments):** Provides guidance on the classification and measurement of financial instruments, including the treatment of preference shares.
### **3. **Impact of the April 2011 Amendment:**
The amendment you are referring to from April 2011 likely pertains to the introduction of new accounting standards that affect the presentation of financial instruments. Specifically:
- **The revised Accounting Standards (AS) and Ind AS:** Require that redeemable preference shares with fixed terms of repayment be classified as financial liabilities. This would imply that such preference shares should be recorded under long-term borrowings or liabilities rather than as part of shareholders' equity.
- **The Companies Act, 2013:** Emphasizes the proper classification of financial instruments in compliance with accounting standards.
### **4. **Practical Implications:**
- **Accounting Treatment:** Redeemable preference shares (those with a fixed redemption date and/or fixed dividend) are generally treated as liabilities in the financial statements. This reclassification would place them under long-term borrowings or financial liabilities.
- **Disclosure:** Companies must ensure proper disclosure in their financial statements according to the revised standards and the Companies Act, 2013.
### **Conclusion:**
Preference shares that were previously classified under shareholders' funds may need to be reclassified as long-term liabilities if they are redeemable and meet the criteria for such classification under the new accounting standards. This reclassification reflects their nature as financial instruments with fixed obligations.
For accurate implementation, refer to the latest guidelines from the Institute of Chartered Accountants of India (ICAI), consult with your company's financial advisor, or review the specific Ind AS or Accounting Standards applicable to your situation.
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