FAC2602
Learning
Unit 9 2022.
, LEARNING OUTCOME
You should be able to account for any preference dividends in the consolidated annual
financial statements of companies in accordance with International Financial Reporting
Standards (IFRS).
OVERVIEW
9.1 INTRODUCTION ........................................................................................................ 2
9.2 CONSOLIDATION PROCEDURES IF THE SUBSIDIARY'S CAPITAL INCLUDES
PREFERENCE SHARES ........................................................................................... 3
9.3 TREATMENT OF PREFERENCE DIVIDENDS OF THE SUBSIDIARY ................... 10
9.4 EXERCISES ............................................................................................................. 31
SELF-ASSESSMENT ............................................................................................................ 56
KEY CONCEPTS
• Preferential rights
• Cumulative and non-cumulative preference shares
• Participating and non-participating preference Shares
• Arrear preference dividends
• Allocation of dividend to NCI
• Pro forma consolidation entries
ASSESSMENT CRITERIA
After studying this learning unit, you should be able to:
• calculate the parent's percentage interest in the preference share
capital of the subsidiary
• record any preference dividends paid or declared by a subsidiary in the
consolidated annual financial statements in accordance with IFRS
• record arrear cumulative preference dividends payable or paid by a
subsidiary in the consolidated annual financial statements in
accordance with IFRS
• allocate the dividend to non-controlling interests
• do the pro forma consolidation journal entries
1
,9.1 INTRODUCTION
In learning unit 8, we discussed the treatment of dividends where the subsidiary's share capital
consists of ordinary share capital only. In this learning unit, we deal with the treatment of
preference share capital and preference dividends. Preference shares carry a fixed dividend
percentage. When adequate profits are available, these shares have a preference right to
dividends.
Preference shares can only exist when another class of shares (generally ordinary shares)
exists so the preference shares can enjoy certain preferential rights in comparison to the other
shares.
The preferential rights in respect of dividends are probably the most important right attached
to preference shares. This right is normally expressed as a percentage of the value of the
share, for example 9% preference shares with an issued value of R400 000 would receive a
dividend of R36 000 (9% x R400 000). If the subsidiary is liquidated, the preference owners will
therefore receive a maximum amount of R400 000.
Where a subsidiary has issued preference shares, these shares have a preferential claim to
the profit of the company, whereas the balance is attributable to the ordinary owners. As in the
case of ordinary shares, preference owners cannot legally lay claim to their share of the profit
before a company has declared a preference dividend. If the preference shares are cumulative,
ordinary owners may receive no dividend in the current reporting period, unless a preference
dividend is declared.
We can classify preference shares as follows with regard to dividends:
• Non-cumulative
These owners are not entitled to payment of arrear dividends.
• Cumulative
If no dividend is declared in a specific reporting period, there is a cumulative preferential
right, which is a right to have preference to the arrear and current preference dividends
before a dividend may be declared on any other class of shares on the first subsequent
dividend declaration. Even if the company does not declare a formal dividend to the
preference owners, a dividend will accrue and become payable based on the terms of the
preference shares.
Normally, cumulative preferential rights to dividends are specifically prescribed in the
designation of the shares, for example 8% cumulative preference shares. Where it is
not specifically stipulated, it is assumed that preference shares are cumulative.
Participating preference shares share in the profits of a company after the payment of
the preference dividend, whereas convertible preference shares are convertible to
ordinary shares at a specific date in future. Although a company may not buy its own
shares, it may buy back (redeem) redeemable preference shares at a predetermined
price after a specific period.
2
, Where preference shares are held in a subsidiary, this affects the calculation of the non-
controlling interests in the consolidated statement of profit or loss and other comprehensive
income and the statement of financial position. By the time you have completed this learning
unit, you should have a clear understanding of this concept.
Liability versus equity
When the issuer of preference shares has a contractual obligation to deliver cash or a financial
instrument to the holder of the preference shares, or does not have an unconditional right to
avoid delivering cash or a financial asset to settle the contractual obligation, the obligation
meets the definition of a financial liability (IAS 32.19). Likewise, if the issuer of preference
shares does have an unconditional right to avoid delivering cash or a financial asset to settle
the contractual obligation, the obligation meets the definition of an equity instrument. An equity
instrument is any contract that evidences a residual interest in the assets of an entity after
deducting the liabilities.
In FAC2602 we do not classify financial instruments. It is therefore assumed that preference
shares that provide for the mandatory redemption by the issuer of the shares, for a fixed amount
at a fixed future date, and where the payment of the dividends is compulsory, are classified as
financial liabilities. Such an investment is not consolidated. In all other instances preference
shares are assumed to be non-redeemable and therefore regarded as equity instruments. In
FAC2602 we will assume all preference shares are classified as equity and therefore
consolidate them where applicable.
9.2 CONSOLIDATION PROCEDURES IF THE SUBSIDIARY'S CAPITAL
INCLUDES PREFERENCE SHARES
Since the parent's percentage interest in the ordinary share capital of the subsidiary is not
necessarily the same as its percentageinterest in the preference share capital, we recommend
that you always draw up two separate analyses of owner’s equity, namely one for ordinary
share capital and one for preference share capital.
Carefully work through the following example:
3
Learning
Unit 9 2022.
, LEARNING OUTCOME
You should be able to account for any preference dividends in the consolidated annual
financial statements of companies in accordance with International Financial Reporting
Standards (IFRS).
OVERVIEW
9.1 INTRODUCTION ........................................................................................................ 2
9.2 CONSOLIDATION PROCEDURES IF THE SUBSIDIARY'S CAPITAL INCLUDES
PREFERENCE SHARES ........................................................................................... 3
9.3 TREATMENT OF PREFERENCE DIVIDENDS OF THE SUBSIDIARY ................... 10
9.4 EXERCISES ............................................................................................................. 31
SELF-ASSESSMENT ............................................................................................................ 56
KEY CONCEPTS
• Preferential rights
• Cumulative and non-cumulative preference shares
• Participating and non-participating preference Shares
• Arrear preference dividends
• Allocation of dividend to NCI
• Pro forma consolidation entries
ASSESSMENT CRITERIA
After studying this learning unit, you should be able to:
• calculate the parent's percentage interest in the preference share
capital of the subsidiary
• record any preference dividends paid or declared by a subsidiary in the
consolidated annual financial statements in accordance with IFRS
• record arrear cumulative preference dividends payable or paid by a
subsidiary in the consolidated annual financial statements in
accordance with IFRS
• allocate the dividend to non-controlling interests
• do the pro forma consolidation journal entries
1
,9.1 INTRODUCTION
In learning unit 8, we discussed the treatment of dividends where the subsidiary's share capital
consists of ordinary share capital only. In this learning unit, we deal with the treatment of
preference share capital and preference dividends. Preference shares carry a fixed dividend
percentage. When adequate profits are available, these shares have a preference right to
dividends.
Preference shares can only exist when another class of shares (generally ordinary shares)
exists so the preference shares can enjoy certain preferential rights in comparison to the other
shares.
The preferential rights in respect of dividends are probably the most important right attached
to preference shares. This right is normally expressed as a percentage of the value of the
share, for example 9% preference shares with an issued value of R400 000 would receive a
dividend of R36 000 (9% x R400 000). If the subsidiary is liquidated, the preference owners will
therefore receive a maximum amount of R400 000.
Where a subsidiary has issued preference shares, these shares have a preferential claim to
the profit of the company, whereas the balance is attributable to the ordinary owners. As in the
case of ordinary shares, preference owners cannot legally lay claim to their share of the profit
before a company has declared a preference dividend. If the preference shares are cumulative,
ordinary owners may receive no dividend in the current reporting period, unless a preference
dividend is declared.
We can classify preference shares as follows with regard to dividends:
• Non-cumulative
These owners are not entitled to payment of arrear dividends.
• Cumulative
If no dividend is declared in a specific reporting period, there is a cumulative preferential
right, which is a right to have preference to the arrear and current preference dividends
before a dividend may be declared on any other class of shares on the first subsequent
dividend declaration. Even if the company does not declare a formal dividend to the
preference owners, a dividend will accrue and become payable based on the terms of the
preference shares.
Normally, cumulative preferential rights to dividends are specifically prescribed in the
designation of the shares, for example 8% cumulative preference shares. Where it is
not specifically stipulated, it is assumed that preference shares are cumulative.
Participating preference shares share in the profits of a company after the payment of
the preference dividend, whereas convertible preference shares are convertible to
ordinary shares at a specific date in future. Although a company may not buy its own
shares, it may buy back (redeem) redeemable preference shares at a predetermined
price after a specific period.
2
, Where preference shares are held in a subsidiary, this affects the calculation of the non-
controlling interests in the consolidated statement of profit or loss and other comprehensive
income and the statement of financial position. By the time you have completed this learning
unit, you should have a clear understanding of this concept.
Liability versus equity
When the issuer of preference shares has a contractual obligation to deliver cash or a financial
instrument to the holder of the preference shares, or does not have an unconditional right to
avoid delivering cash or a financial asset to settle the contractual obligation, the obligation
meets the definition of a financial liability (IAS 32.19). Likewise, if the issuer of preference
shares does have an unconditional right to avoid delivering cash or a financial asset to settle
the contractual obligation, the obligation meets the definition of an equity instrument. An equity
instrument is any contract that evidences a residual interest in the assets of an entity after
deducting the liabilities.
In FAC2602 we do not classify financial instruments. It is therefore assumed that preference
shares that provide for the mandatory redemption by the issuer of the shares, for a fixed amount
at a fixed future date, and where the payment of the dividends is compulsory, are classified as
financial liabilities. Such an investment is not consolidated. In all other instances preference
shares are assumed to be non-redeemable and therefore regarded as equity instruments. In
FAC2602 we will assume all preference shares are classified as equity and therefore
consolidate them where applicable.
9.2 CONSOLIDATION PROCEDURES IF THE SUBSIDIARY'S CAPITAL
INCLUDES PREFERENCE SHARES
Since the parent's percentage interest in the ordinary share capital of the subsidiary is not
necessarily the same as its percentageinterest in the preference share capital, we recommend
that you always draw up two separate analyses of owner’s equity, namely one for ordinary
share capital and one for preference share capital.
Carefully work through the following example:
3
