Consolidations Chapter 8: Preference Shares

The following notes are made on important principles and concepts I have learned in this chapter:

  1. Preference share capital is share capital that has preference over the other share capital of an entity. The share capital in chapter 1-4 only consisted of ordinary share capital.
  2. These preference shares get their dividends paid out first, have no voting rights like in the case of ordinary shares and their dividends are based on an annual fixed percentage.
  3. Preference shares can either be
  • Cumulative – preference shareholders are entitled to the dividends even if the entity does not declare preference dividends for that specific period (can be in arrears for previous years not declared); or
  • Non-Cumulative – preference shareholders are not entitled to the dividends if the entity does not declare preference dividends for that specific period (cannot be in arrears for previous years not declared).
  1. Preference share capital has its own Analysis of Equity.
  2. In the Analysis of Equity, the preference share capital will only have retained earnings at-acquisition date if the preference shares are cumulative and are in arrears form BEFORE the date of acquisition.
  3. The preference share capital will also only have retained earnings in the ‘since’-period (from date of acquisition until the beginning of the current period) in the Analysis of Equity if the preference shares are cumulative and are in arrears DURING this ‘SINCE’-period.
  4. The profit attributable to the preference share capital in the CURRENT period in the Analysis of Equity is the amount of dividends declared for that specific period.
  5. When distributing the profit for the current period for ordinary shares, the profit (dividend) attributable to preference shares (see point 7 above) must first be taken out of the subsidiary’s total profit so that the remaining profit can go to the parent’s and Non-Controlling Interest’s ordinary shareholders.
  6. Point 8 is because of the fact that preference shares have a preference over others to get their dividend – form the profit for the year – first (see point 1 and 2).
  7. Most of the extra calculations from introducing the preference shares are done in the Analysis of Equity – Preference Share Capital, these amounts are then used just like in the case of the Analysis of Equity – Ordinary Share Capital to calculate correct end-balances to be disclosed in the Consolidated Financial Statements of the Group, already shown in the Consolidations Chapter 1-3 entry on this e-portfolio.
  8. At-acquisition journal entry:
  Dr Cr
Preference Share Capital – Opening Balance (S) x  
Goodwill x  
        Investment in S Ltd (P)   x
        Non-Controlling Interest (SCE)   x

 

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