Interest and dividends: classification decides

Learning objectives

• Explain that interest, dividends, losses and gains relating to an instrument classified as a liability are recognised in profit or loss, and distributions to holders of equity instruments directly in equity.L1
• Account for a dividend depending on whether the share is classified as a liability or as equity.L3

Normative references

• IAS 32 §35Interest, dividends, losses and gains relating to a financial instrument, or a component, that is a financial liability are recognised as income or expense in profit or loss; distributions to holders of an equity instrument are recognised directly in equity; transaction costs of an equity transaction are accounted for as a deduction from equity.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• Dividends on a share classified as a financial liability are recognised in profit or loss, whereas distributions to holders of an equity instrument are recognised directly in equity.L1
• Pavot SA has two classes of shares: ordinary shares, which are equity instruments, and preference shares redeemable in cash on a fixed date, classified as a financial liability (case facts). The general meeting decides a dividend of 40,000 on the ordinary shares and of 25,000 on the preference shares. How does Pavot account for these two dividends?L3
• Ondine SA has issued preference shares with a total nominal value of {nominal_amount}, classified as a financial liability. The contract sets an annual dividend of {dividend_rate} of the nominal, due for the year and not yet paid (case data). Record the entry for the dividend of the year.L3