¾ Preferred shares have contractual provisions that give them a preference, or priority,
over common shares in certain areas. Typically preferred shares have priority over
dividends, and assets in the event of liquidation. They do not generally have voting
rights. Like common shares, preferred shares may be issued for cash or for noncash
assets. They can also be reacquired.
Dividend Preference: corporate income is distributed to preferred shareholders before it goes
to common shareholders. The first claim to dividends does not, however, guarantee the
payment of dividends.
¾ Cumulative Dividend: means that preferred shareholders must be paid both current
year dividends and any unpaid prior year dividends before common shareholders
receive dividends. When preferred shares are cumulative, preferred dividends that are
not declared in a given period are called dividends in arrears. Dividends in arrears are
not considered a liability. No payment obligation exists until a dividend is declared by
the board of directors.
Convertible Preferred: shares give shareholders the option of exchanging preferred shares for
common shares at a specified ratio. The conversion of preferred shares does not result in
either a gain or a loss to the corporation. Note that the market values of the shares at the time
of the transaction are not considered in recording the transaction.
Redeemable and Retractable Preferred: Redeemable preferred shares give the issuing
corporation the right to purchase the shares from the shareholders at specified future dates and
prices. Retractable preferred shares are similar to redeemable preferred shares except that the
arrangements of this sort are known as financial instruments. The CICA requires companies
to present financial instruments in accordance with their economic substance rather than their
form. That is, redeemable and retractable preferred shares are usually presented in the
liabilities section of the balance sheet rather than in the equity section.
Liquidation Preference: the assets will be used to pay the preferred shareholders first if the
corporation goes bankrupt.