Redeemable Preference Shares (RPS) - Liability or Equity
Updated: Jul 20, 2022
The rules for the classification of the preference shares has been prescribed by MFRS 132 in Malaysia which is equivalent to IAS 32. Entities that comply with MFRS 132 will simultaneously be in compliance with IAS 32.
Preference shares can be classified as equity, liability or combination of the two.
As per IAS 32.15, for classification purposes, to consider the substance of the contractual agreement in order to classify the RPS as liability or equity.
In the event there is a conflict or inconsistency arises between the applicable approved accounting standards, e.g. MFRS, MPERS, IFRS, IFRS for SME and Companies Act 2016, subsection 244 (7) of the Companies Act 2016 provides that the applicable approved accounting standards shall prevail.
RPS classified as Equity
As per IAS 32.16, the RPS is to be classified as equity if and only if, both conditions (a) and (b) below are met:
(a) The RPS includes NO contractual obligation:
(i) to deliver cash or another financial asset to another entity;
(ii) to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavourable to the issuer of the RPS.
(b) If the RPS will or may be settled in the issuer's own equity instruments, it is;
(i) a non-derivative that includes no contractual obligation for the issuer to
deliver a variable number of its own equity instruments; or
(ii) a derivative that will be settled only by the issuer exchanging a fixed amount of
cash or another financial asset for a fixed number of its own equity
RPS classified as Liability
Some essential features are as follows:
As per IAS 11, a financial liability is defined as:
a contractual obligation to deliver cash or another financial asset to another entity, therefore, RPS which has this features should be classified as a liability.
As per IAS 32.18 (a) , the RPS is to be classified as liability if:
If the RPS provides for mandatory redemption by the issuer for a fixed or determinable amount at a fixed date or gives the holder the right to require the issuer to redeem at a particular date and for a fixed or determinable amount.
Dividends relating to RPS
As per IAS 32.35:
interest, dividends, losses and gains relating to RPS that have been classified as liability shall be reported in profit or loss as an expense.
interest, dividends, losses and gains relating to RPS that have been classified as equity shall be recognised directly in equity.
Companies Act 2016
As per Section 131 of the Companies Act 2016, a company may only make distributions to shareholders out of profits.
This may be only for the RPS that has been classified as equity.
Nevertheless, as mentioned above, in the event there is a conflict or inconsistency arises between applicable approved accounting standards and Companies Act 2016, subsection 244 (7) of the Companies Act 2016 provides that the accounting standards shall prevail.
All information contained herein is summarised based on the provisions of MFRS 132 which is equivalent to IAS 32 and Companies Act 2016 and it is intended to provide a general overview of the subject matter and should not be regarded as a basis for ascertaining the tax liability in specific circumstances or as a a basis for formulating business decisions. No responsibility for loss to any person acting or refraining from acting as a result of any material in this publication can be accepted by GSK & Associates. Readers should not act on the basis of this publication without seeking professional advice.
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