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Hi sir,
there is something I would like to clarify with you. From what I understand, both Ordinary Dividends paid and Preference Dividends paid will be entered into the Statement of Changes in Equity correct?
While I was doing the BPP revision kit in, I came across two questions which made me confused with what I understood, being
1) When asked whether this statement was correct or not, according to IFRS,
“Dividends paid on redeemable preference shares are treated in the same way as dividends paid on ordinary shares”I chose correct, but the answer was wrong.
2) When asked which of the following should appear as separate items in a company’s statement of changes in equity?
1. Profit for the financial year
2. Income from investments
3. dividends paid on redeemable preference shares
4. Dividends paid on equity sharesI chose 1, 3 and 4 but the correct answer was “1 and 4 only”
For both the questions, the explanation given by BPP was ” Dividends paid on redeemable preference shares are treated like interest on loans and are shown in the statement of comprehensive income as finance charge.”
Please help me clear up my doubt!
BPP are correct. Redeemable (i.e. repayable) preference shares are just like taking a loan from the bank – a fixed dividend is payable (just like interest is payable to the bank) and then the shares are repaid (just like repaying a loan).
So redeemable preference shares are treated just like a loan from the bank – they appear on the Statement of financial position as a non-current liability, and the dividend appears on the Statement of profit or loss as a finance charge (interest).However, dividends on irredeemable preference shares (i.e. never repayable) are treated just like dividends on ordinary shares.
I see. I understand now. If the question does not specify whether it is redeemable or irredeemable, do we assume it to do irredeemable?
Can you please tell how and why total comprehensive income for the year comes in statement of changes in equity?
And should’nt profit after tax come in statement of changes in eqiuity?The total comprehensive income does not appear in the Statement of Changes in Equity as a separate figure.
The profit after tax does appear as one of the reasons for the change in Retained Earnings. Any surplus on revaluation does appear as a reason for the change in the Revaluation Reserve.
I suggest you look at Page 86 of our free Lecture Notes to see the layout of the statement (and watch the free lecture that goes with the chapter).
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