A company has issued redeemable preference shares that must be redeemed for cash on a fixed date. How should these be classified, and how should the dividends on them be treated?

Correct answer: A) As a liability, with dividends treated as a finance cost

Explanation

Under IAS 32, redeemable preference shares that must be redeemed for cash on a fixed date create a contractual obligation to pay cash to the holder, so they are classified as a financial liability (usually non-current), not equity. Consistent with this, the dividends on them are presented as a finance cost in profit or loss rather than as a distribution in the statement of changes in equity. Irredeemable preference shares with discretionary dividends would instead be equity, with dividends shown in the statement of changes in equity.