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Lets have another discussion!!

CA Pooja Agarwal (Chartered Accountant) (3228 Points)

12 October 2012

ok freinds lets have another heated discussion

Is Preference Share a debt or equiyt?

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CA AYUSH AGRAWAL (Kolkata-Pune-Mumbai) (26986 Points)
Replied 12 October 2012

Ok, I Will Carry onThis Discussion .

Preference shares (prefs) are legally shares, but they are very different from ordinary shares. The economic effect of prefs is more like that ofbonds. Like convertibles, they are regarded as hybrids of debt and equity:

Dividends on preference shares have to be paid before dividends on ordinary shares.

Dividends on ordinary shares may not be paid unless the fixed dividends on preference shares is paid first.

Dividends are fixed like bond coupons, although there are usually provisions to not pay, or delay payments.

Preference shareholders have a higher priority if a company isliquidated than ordinary shareholders, although a lower priority than debt holders.

In the case of cumulative prefs, if the dividend is not paid in full, the unpaid amount is added to the next dividend due.

Preference dividends are fixed, so they do not participate in increases (or decreases) in profits as ordinary shareholders do.

The effect of these is to make the income stream from preference shares more similar to that from debt than that from ordinary shares. Most importantly, fixed dividends are similar to interest payments. However, they are legally shares and are subject to the same tax treatment.

CA Pooja Agarwal (Chartered Accountant) (3228 Points)
Replied 12 October 2012

while calculating owners equity.will you include preference shres or not

CA Shree Jain (Chartered Accountant) (1572 Points)
Replied 12 October 2012

Nice question and nice answer also:

Preference shares typically have attributes of both debt and equity instruments.

It resembles equity in the following ways:

Dividend on these shares are payable out of distributable profits
Dividends are not an obligatory payment and are entirely at the discretion of the directors
Dividends are not tax deductible payment

Preference shares are similar to debt in many ways:

Dividend rates are fixed similar to any debt instrument
In case the company goes into liquidation, the claim of preference share holders precede the claims of equity share holder
Preference share holders normally do not enjoy the right to vote

CA AYUSH AGRAWAL (Kolkata-Pune-Mumbai) (26986 Points)
Replied 12 October 2012

Originally posted by : CA Pooja Agarwal
	while calculating owners equity.will you include preference shres or not

It Depends on Case by Case.

EveryTime Equity Calculation is Specified. Have Different calculation in Every terms.

CA Shree Jain (Chartered Accountant) (1572 Points)
Replied 12 October 2012

While calculating owners equity, preference shres are not included

Aarush (Delhi) (1566 Points)
Replied 12 October 2012

Schedule six of the Companies Act does not imply that companies have to start classifying redeemable preference shares as per IFRS.

Now What IFRS said :-

As per the International Financial Reporting Standards (IFRS), redeemable preference shares should be shown under the head long-term financial liability on the liability side.

Earlier coporate house annoy that reedemable prefernce shares should disclosre as "Long term liability" instead of clubbing in " Share capital" but Mr. Jain added that it will be disclose as a part of "Share capital" otherwise change would have impacted the bottomlines of companies negatively.

The proposed schedule six is framed in such a way that once the law is amended, there is no need to further amend the schedule.

Hence both kind of preference should treat as " Equity Capital"

PL ADD IF ANYTHING I FORGET TO SPOT.

CA Pooja Agarwal (Chartered Accountant) (3228 Points)
Replied 12 October 2012

my question remains unanswered..."preference share capital forms part of shreholder's fund or will you show it as "outside liabilty"

CA AYUSH AGRAWAL (Kolkata-Pune-Mumbai) (26986 Points)
Replied 12 October 2012

Originally posted by : CA Pooja Agarwal
	my question remains unanswered..."preference share capital forms part of shreholder's fund or will you show it as "outside liabilty"

Your Query Already Solved by Ashish, & I Will Specify You Again, That Prefrence SC Vary on Conditions While Issuing.

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CA Pooja Agarwal (Chartered Accountant) (3228 Points)
Replied 12 October 2012

lets take pref share is cumulative

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Aarush (Delhi) (1566 Points)
Replied 12 October 2012

What kind of discussion is this ?

All answers are lie above..

either its is reedemable or non reedemable or cumulative or non cumultive all should group with " Equity Capital' under Shareholder's Group.

CA Manish (Job) (5264 Points)
Replied 12 October 2012

As per the International Financial Reporting Standards (IFRS), redeemable preference shares should be shown under the head long-term financial liability on the liability side.

The company law, in contrast, requires them to be classified as equity capital on the liability side.

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Damandeep Singh (Student) (1062 Points)
Replied 12 October 2012

Can General public subscribe to Preference Shares??

CA AYUSH AGRAWAL (Kolkata-Pune-Mumbai) (26986 Points)
Replied 12 October 2012

Originally posted by : Damandeep Singh
	Can General public subscribe to Preference Shares??

Yes OffCourse, Provided Shares are listed...

1 Like

CA D R P (Chartered Accountant) (313 Points)
Replied 12 October 2012

Respected

Preference share holders can not vote in general meeting, so they are to be treated as "OUTSIDE LIABILITY" because..........

1. Owner's capital/fund means ; "where subseuent to purchase of shares, that person enjoys rights of ownership"

2. In case of Preference shares , share holder doesn't get the right to vote , so in my opinion it forms part of "OUTSIDE LIABILITY".

3. CONTROVERSIAL ISSUE IS THAT ON PREFERENCE SHARES DIVIDEND IS NOT COMPULSORY; ONLY PREFERENCIAL RIGHT IS GIVEN..... BUT, THAT IS A LAW!!!!!

LAW CAN BE AMENDED AND PREF. DIVIDEND CAN BE MANDATED BY CHANGING THE NAME FROM DIVIDEND TO RETURNS.

4. BUT PREF. SHARE HOLDERS DON'T HAVE RIGHT TO VOTE; PLUS THY CAN BE OF MAX 20 YEARS' AGE; SUCH FEATURES ALLOWS ME TO SAY THIS INSTRUMENT AS LIABILITY!!!