Preference Dividend

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zippy
zippy Registered Posts: 28 Regular contributor ⭐
in AAT Level 4 (Level 8 in Scotland)
Hello

Hope someone can clear something up for me.

I'm doing a question for DFS and it says: "the outstanding preference dividend must be provided for" (TB has 8% preference shares £500,000)

I know that with ordinary dividends you only show them as a note to the accounts rather than including them on the balance sheet, but with these being preference shares do you include them as an accrual as they have to be paid? (the company in question has enough reserves)

OR, am I completely wrong? :001_unsure:

Thanks

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  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    If an enterprise issues preference shares that pay a fixed rate of dividend and are redeemable at a future date, the substance is that they are a contractual obligation to deliver cash and you should therefore recognise the transaction as a liability.

    Bear in mind however, that the transactions may not be a "dividend". If it is a fixed rate dividend (the 8% sounds like it is) then it should be treated as interest.

    Kind regards
    Steve

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