Redeemable Preferred Share - Equity or Liability

[FP Russell]

Hi,

I have a query regarding the below scenario.

Preferred shares were issued with the option for the holder to redeem with 60 days notice after which time the share will cease to participate in any profits. This is a private entity and the shares were issues to facilitate a joint venture with a subsidiary. Dividend payments are discretionary and to date none have been declared or paid. These shares have been outstanding since 2005 and since that time they have been reported in the financial statements as equity - pref shares. There was a recent suggestion to reclassify the shares as a liability based solely on the fact that the holder has the right to redeem within 60 days. I do not think this new proposal is accurate and it should continue to be reported as preferred shares for all the other reasons already listed. I would appreciate comments and discussion.

 

[Fidget]

This will likely depend on the standards you're using. Under IFRS, by virtue of the fact that they can be redeemed by giving 60 days notice should the holder wish to redeem them, means that a liability exists and it would be wrong to treat them as equity.