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?
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.