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Noncumulative dividends on preferred stock generally do not accrue to the holders of preferred stock until declared by the board of directors. The exception is when preferred stock requires the issuer to pay a periodic dividend even without a declaration by the board of directors. When noncumulative dividends are discretionary, they should be recorded when they are declared. When the issuer is legally obligated to pay dividends, they should be accrued as they are earned. Noncumulative dividends, generally, do not add to the liquidation or redemption value of preferred stock.
Cumulative dividends on preferred stock may accrue over time or upon the occurrence of an event (e.g., the attainment of cash flow goals or profitability levels). If the preferred shareholders do not receive a dividend (the board of directors does not declare a dividend) in a given period, then the undeclared dividend is accumulated. The issuer is obligated to pay any accumulated undeclared dividends upon liquidation and, in some cases, upon early redemption of the preferred stock. Some preferred stock requires the issuer to pay a periodic dividend even without a declaration by the board of directors. When cumulative dividends can be accumulated (or deferred), they should be recorded when they are declared or when accretion to the redemption amount is otherwise required. Alternatively, when the issuer is legally obligated to pay cumulative dividends, they should be accrued as they are earned.
When preferred shareholders participate in dividends with common shareholders, the two-class method of computing earnings per share may be applicable. See FSP 7.4.2 for information on participating securities and the two-class method of calculating earnings per share.
An issuer should determine how to reflect preferred stock dividends in earnings per share independent from its accounting for cumulative preferred stock dividends. In most cases, an issuer’s earnings per share computations should reflect accrued undeclared dividends related to cumulative preferred stock. See FSP 7.4 for information on including preferred stock dividends in basic earnings per share.
See FG 4.4 for additional information on dividends.
Question FG 7-14 addresses whether cumulative dividends should be recorded as an increase to the carrying amount of preferred stock even when not declared.
Question FG 7-14
A reporting entity issues preferred stock that pays cumulative dividends and is redeemable at the holder’s option after four years. The redemption price is equal to the original issue price plus the cumulative dividends, whether or not declared. The issuer classifies the preferred stock in mezzanine equity because it is not mandatorily redeemable (i.e., the holders may or may not exercise the redemption right) but redemption is outside of the issuer’s control.

Should dividends be recorded as an increase to the carrying amount of the preferred stock even when not declared?
PwC response
Yes. Generally, an issuer records a dividend payable when the dividend is declared. However, the terms of the preferred stock require the issuer to pay the original issue price of the preferred stock plus cumulative dividends, whether or not declared, upon redemption. Therefore, the issuer should accrete the dividends as an increase to the carrying amount of the preferred stock pursuant to ASC 480-10-S99-3A, despite the fact that dividends have not been declared.

7.7.1 Dividends paid in another class of stock

When a stock dividend on preferred shares is paid in another class of stock, the issuer should record the fair value of the shares issued in retained earnings. See FG 4.4.4.1 for further information. As discussed in ASC 260-10-45-12, dividends declared on preferred stock that are payable in the issuer’s common shares should be deducted from earnings available to common shareholders when computing earnings per share. Accordingly, an adjustment to net income (for EPS purposes) for preferred stock dividends is required regardless of the form of the payment (whether the dividend is paid in cash, common shares, or additional preferred shares of the same or another class).

7.7.2 PIK dividends

Some preferred stock includes a paid-in-kind dividend feature (where dividends are paid in shares of the same class of stock). This preferred stock may either require the issuer to pay the dividend in additional shares of stock (nondiscretionary PIK dividend) or allow the issuer to choose between paying the dividend in additional shares of stock or in cash (discretionary PIK dividend). For example, an issuer may issue 10,000 shares of convertible preferred stock with a liquidation preference of $1,000/share that carries a 10% stated dividend rate, payable semi-annually. Typically, if the dividend were to be PIK, the issuer would issue on each dividend payment date 500 additional shares of convertible preferred stock with a liquidation preference of $500,000. We believe the issuer should record the PIK dividend as follows:
  • If the issuer has the right to decide whether to pay the PIK dividend in cash or in kind (PIK dividends are discretionary), the issuer should record the PIK dividend at the fair value of the preferred stock at the dividend declaration date.
  • If the issuer is required to pay the dividend in kind (PIK dividends are non-discretionary), the issuer should record the PIK dividend on the declaration date at the contractual rate ($500,000 in this example). This results in accretion of the dividend similar to the amortization of interest on a zero-coupon bond.
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