Preference Shares: Equity or Debt? The Answer Depends on the Terms

October 5, 2026
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A preference share is legally a share, but its accounting classification may be different.

Under financial reporting standards, the key question is not what the instrument is called. The key question is:

Does the issuer have a contractual obligation to deliver cash or another financial asset?

This is the principle of substance over legal form.

A preference share may be recognised as equity, a financial liability, or a compound financial instrument containing both liability and equity components.

Legal Classification and Accounting Classification

From a company law perspective, a preference share is a type of share. The Companies Act 2016 also provides for preference shares.

However, accounting standards focus on the contractual rights and obligations created by the instrument.

Therefore:

An instrument legally called a share may be classified as a financial liability for accounting purposes; and

The name of the instrument does not determine its accounting classification.

The terms and conditions of the agreement are what matter.

The Key Question: Must the Company Repay Cash?

Consider the following example.

CCS Example Sdn. Bhd. issues RM1 million of preference shares with the following term:

The company must redeem the preference shares for RM1 million after five years.

Although the company may initially describe this as RM1 million of share capital, the accounting assessment must consider whether the company has the right to avoid repaying the cash.

If the company has no such right and redemption is mandatory, the instrument has the characteristics of a financial liability.

A preference share that must be redeemed by the issuer at a fixed future date for a fixed amount generally creates a mandatory redemption obligation. From the issuer’s perspective, it is therefore classified as a financial liability and accounted for in accordance with the relevant financial liability requirements.

Redeemable Preference Shares

The term redeemable preference shares should not automatically be taken to mean equity.

Particular attention is required where the terms state:

“The company shall redeem the preference shares at RM1 per share on 31 December 2030.”

The word “shall” is important. It indicates an obligation rather than an option to repay when the company has sufficient funds.

Mandatory redemption, or a holder’s right to require the issuer to redeem the instrument for cash, is a typical indicator of financial liability classification under the IAS 32 and IFRS principles.

When Can Preference Shares Be Classified as Equity?

Preference shares are more likely to be classified as equity when:

They are non-redeemable or irredeemable;

Dividend payments are entirely at the company’s discretion;

The directors can decide not to pay a dividend; and

The company has no contractual obligation to repay the principal on a specified date.

For example, if the directors may decide not to pay a dividend even when the company has made a profit, and the holder cannot require the company to pay cash, the instrument has stronger characteristics of an equity instrument.

A non-cumulative, non-redeemable preference share with dividends payable at the directors’ discretion is generally consistent with equity classification.

A simple way to remember this is:

If the company can genuinely say “no” to a cash payment, the instrument has stronger equity characteristics.

If the company cannot avoid a cash payment, the instrument has stronger liability characteristics.

A Preference “Dividend” May Be Finance Cost

If a preference share is classified as a financial liability, the related preference dividend is not treated in the same way as a distribution on an equity instrument.

The contractual return on a financial liability may be recognised as finance cost.

By contrast:

A distribution on an equity instrument is generally treated as an equity distribution; while

A contractual return on a financial liability is treated as finance cost.

This distinction directly affects profit or loss.

Why Classification Matters

Classifying a financial liability as equity is not merely a matter of placing an item under the wrong heading in the statement of financial position.

For example, if RM10 million of mandatorily redeemable preference shares is incorrectly classified as equity, correcting the classification may result in:

An increase in liabilities;

A decrease in equity;

A higher gearing ratio; and

Recognition of the contractual return as finance cost.

This may affect reported profit and key financial ratios. A company may initially appear to have a strong equity position, but the correction may show that the instrument is, in substance, debt.

Some Instruments Have Both Characteristics

Some preference shares may contain both:

A liability component; and

An equity component.

This is known as a compound financial instrument.

For example, an instrument may include:

A contractual obligation to pay cash; and

A conversion right that meets the conditions for equity classification.

In such cases, the question is not simply whether the instrument is debt or equity. It may contain both characteristics, requiring the liability and equity components to be accounted for separately.

MPERS Section 22 also contains requirements for the split accounting of compound financial instruments.

What Should Be Reviewed in the Preference Share Agreement?

When reviewing a preference share agreement, do not stop at the title “Redeemable Preference Shares”.

The important terms are usually found in the detailed provisions. Review the following:

Is redemption mandatory or optional?

Who has the right to require redemption?

Does the company have an unconditional ability to avoid paying cash?

Are dividends mandatory or discretionary?

Are dividends cumulative or non-cumulative?

Is there a conversion feature?

If conversion is available, how many ordinary shares will be issued?

What are the liquidation terms?

The company secretary may classify the instrument as a share for corporate law purposes, while the accountant may classify it as a financial liability for financial reporting purposes. Both classifications may be correct because they address different questions.

Practical Summary

Do not classify a preference share based only on its name. Review its terms and conditions.

Three common situations are:

1. Mandatory redemption for cash

The company must repay cash in the future.

Likely classification: Financial liability.

2. Non-redeemable with fully discretionary dividends

The company has no contractual obligation to deliver cash.

Likely classification: Equity.

3. Both debt and equity characteristics

The instrument contains both liability and equity features.

Possible treatment: Split the instrument into liability and equity components.

The most important question remains:

Does the issuer have a contractual obligation to deliver cash or another financial asset?

If the answer is yes, the accounting assessment requires careful attention.

A Practical Reminder for Business Owners

When designing preference shares, business owners should discuss the agreement not only with the company secretary and lawyer, but also with the accountant.

The terms relating to voting rights, dividend rates and redemption periods can affect the accounting classification.

A company may believe that it is raising equity, but the resulting financial statements may classify the instrument as borrowing.

Company law looks at what the instrument is called. Accounting looks at whether the company is obliged to repay.

To determine whether a preference share is equity or debt, do not look only at the cover of the agreement. Read the terms and identify who has the right to require whom to pay cash.

CCS | Beyond Numbers

Preference Share 到底是 Equity 还是 Debt？关键在于条款

Preference Share 在法律上确实是一种股份，但在会计上，它可能被分类为完全不同的项目。

根据财务报告准则，关键并不是看这项工具叫什么，而是要问：

发行人是否有合同义务交付现金或其他金融资产？

这就是**实质重于形式（Substance over Legal Form）**的原则。

Preference Share 可能被分类为权益、金融负债，或同时包含负债及权益成分的复合金融工具。

法律分类与会计分类

从公司法角度来看，Preference Share 是一种股份，**《2016 年公司法令》**也对 Preference Share 作出了相关规定。

不过，会计准则关注的是这项工具所产生的合同权利及义务。

因此：

法律上称为 Share 的工具，在会计上可能被分类为金融负债；以及

工具的名称本身，并不能决定其会计分类。

真正重要的是相关协议中的条款与条件。

最关键的问题：公司是否必须偿还现金？

考虑以下例子。

CCS Example Sdn. Bhd. 发行 RM1 million Preference Shares，并订明：

公司必须在五年后以 RM1 million 赎回这些 Preference Shares。

公司可能会说，这是 RM1 million 的 Share Capital。但会计处理必须进一步判断，公司是否有权避免偿还这笔现金。

如果公司没有这样的权利，而赎回又是强制性的，这项工具就具有金融负债的特征。

如果 Preference Share 必须由发行人在固定的未来日期，以固定金额赎回，就通常会产生强制赎回义务。从发行人的角度来看，这项工具应分类为金融负债，并按照相关金融负债的要求进行会计处理。

Redeemable Preference Share

看到 Redeemable Preference Shares，不要自动把它分类为 Equity。

尤其要注意以下条款：

“The company shall redeem the preference shares at RM1 per share on 31 December 2030.”

这里的 “shall” 非常重要。它表示公司承担的是一项必须履行的义务，而不是“有钱才考虑是否偿还”。

强制赎回，或持有人有权要求发行人以现金赎回，都是按照 IAS 32 及 IFRS 原则判断金融负债的典型指标。

Preference Share 什么时候可以分类为 Equity？

在以下情况下，Preference Share 更可能被分类为 Equity：

不可赎回（Non-redeemable 或 Irredeemable）；

股息完全由公司自行决定；

董事可以决定不派发股息；以及

公司没有义务在指定日期偿还本金。

例如，如果即使公司已经盈利，董事仍然可以决定不派发股息，而持有人也不能要求公司支付现金，这项工具就具有较强的权益特征。

如果 Preference Share 是 Non-cumulative、Non-redeemable，并且股息支付完全由董事酌情决定，一般上较符合 Equity 的分类条件。

可以简单记住：

如果公司真正可以说“不支付现金”，这项工具就比较具有 Equity 的特征；

如果公司无法避免支付现金，这项工具就比较具有 Liability 的特征。

Preference “Dividend” 可能是 Finance Cost

如果 Preference Share 在会计上被分类为金融负债，相关的 Preference Dividend 就不能按照普通权益股息的逻辑处理。

金融负债所产生的合同回报，可能需要确认为 Finance Cost（融资成本）。

相反：

Equity Instrument 的分派，通常作为 Equity Distribution 处理；而

Financial Liability 的合同回报，则作为 Finance Cost 处理。

这项区别会直接影响 Profit or Loss。

为什么分类很重要？

把金融负债分类为 Equity，并不只是把一个项目放错在财务状况表的某个位置而已。

例如，假设 RM10 million 的强制赎回 Preference Shares被错误分类为 Equity，纠正后可能导致：

Liabilities 增加；

Equity 减少；

Gearing Ratio 上升；以及

合同回报确认为 Finance Cost。

这可能影响报告利润及主要财务比率。

公司原本可能看起来拥有很强的 Equity，但分类修正后，财务报表可能显示，这项工具在经济实质上其实更接近 Debt。

有些工具可能两种特征都有

有些 Preference Shares 可能同时包含：

负债成分（Liability Component）；以及

权益成分（Equity Component）。

这类工具称为复合金融工具（Compound Financial Instrument）。

例如，一项工具可能同时包含：

支付现金的合同义务；以及

符合权益分类条件的转换权。

在这种情况下，问题不只是“它到底是 Debt 还是 Equity”。它可能同时具有两种特征，因此需要将负债成分及权益成分分开进行会计处理。

MPERS 第 22 节也包含复合金融工具进行拆分会计处理的相关要求。

拿到 Preference Share Agreement 后，应该看什么？

看到文件标题写着 Redeemable Preference Shares，不要马上把文件合上。

真正重要的内容，通常藏在后面的详细条款中。应当检查：

Redemption 是 Mandatory 还是 Optional？

谁拥有要求 Redemption 的权利？

公司是否拥有无条件避免支付现金的能力？

Dividend 是 Mandatory 还是 Discretionary？

Dividend 是 Cumulative 还是 Non-cumulative？

是否包含 Conversion Feature？

如果可以转换，可以换取多少 Ordinary Shares？

Liquidation 条款是什么？

Company Secretary 可能会从公司法角度把它分类为 Share，而 Accountant 则可能从财务报告角度把它分类为 Financial Liability。两种分类都有可能是正确的，因为它们回答的是不同的问题。

简单总结

不要只看 Preference Share 的名称，必须查看它的条款与条件。

常见的三种情况如下：

一、必须以现金赎回

公司未来必须偿还现金。

**通常分类为：**Financial Liability。

二、不可赎回，股息完全由公司自行决定

公司没有合同义务交付现金。

**通常分类为：**Equity。

三、同时具有 Debt 与 Equity 特征

这项工具同时包含负债及权益特征。

**可能的处理方式：**将工具拆分为 Liability Component 与 Equity Component。

最重要的问题始终是：