Question

Based on the substance over form principle, explain the accounting treatment of redeemable preference shares.

Answer 1

Substance over form: This principle requires issuers to measure and present the economic impact of the financial instrument and to state its commercial purpose.

Preference Shares can be classified as equity, liability, or both.

The organization can recognize Preference shares based on substance over form

The Redeemable preference shares are reported as a liability in the financial statements enough though it is a share they are a liability as per their nature because entity have to redeem the shares on a specific date to the holder by paying the agreed amount.