Non-Equity Share

Definition: Non-Equity Share

A Non-Equity Share, under former UK accounting rules, refers to a type of share in a company possessing certain characteristic limitations, including:

• Rights limited to receive payments not calculated by reference to the company’s assets, profits, or the dividends on any class of equity share.
• Rights in liquidation limited to a specific amount not calculated by reference to the company’s assets or profits.
• Shares that are redeemable either according to their terms or because the holder or any party other than the issuer could require redemption.

This concept was initially detailed in the Financial Reporting Standard (FRS) 4, Capital Instruments. However, in January 2005, FRS 4 was replaced by FRS 25, Financial Instruments: Disclosure and Presentation, rendering ‘preference shares’ as non-equity share capital obsolete.

Examples of Non-Equity Shares

1. Preferred Stock with Fixed Dividends: Shares with predetermined dividend payouts not linked to the company’s financial performance; classified as non-equity if they have redeemable terms or fixed liquidation rights.
2. Redeemable Preference Shares: Shares that can be repurchased by the issuing company or at the shareholder’s request.
3. Perpetual Preferred Shares: Have fixed dividend rights without a set maturity date but allowed under specific redemption clauses.

Related Terms

1. Preference Shares

   • Shares that have preferential rights over common shares, usually in dividend payments and during liquidation. They might still be seen under certain frameworks but not as non-equity capital.

2. Equity Shares

   • Typically ordinary/common shares representing ownership in a company with variable dividends and rights to vote in company decisions.

3. Financial Reporting Standard (FRS) 4

   • This standard provided guidelines on how financial instruments, specifically capital instruments, were reported in the financial statements.

4. International Financial Reporting Standards (IFRS)

   • A set of accounting standards developed by the International Accounting Standards Board (IASB) that are becoming the global standard for the preparation of public financial statements.

Frequently Asked Questions (FAQs)

Q: What was the primary purpose of FRS 4 regarding non-equity shares?

A: FRS 4 aimed to outline how financial instruments, including non-equity shares, should be treated in financial statements, ensuring transparency and consistency.

Q: How did FRS 25 change the classification of non-equity shares?

A: FRS 25 redefined and replaced the classification rules set by FRS 4, thereby phasing out the non-equity share concept by revising the criteria for financial instruments’ classification.

Q: Are non-equity shares recognized under IFRS?

A: No, the concept of non-equity shares is not recognized under International Financial Reporting Standards (IFRS).

Q: What are redeemable shares?

A: Redeemable shares are those that a company can repurchase from the shareholders, either on a certain date or at the shareholder’s request, depending on the terms.

Online References

1. ICAEW: Non-equity Shares - Detailed articles and resources on non-equity shares.
2. IAS Plus: IFRS Standards - Comprehensive guide and updates on IFRS.
3. FRS Standards - Information on various FRS reports and standards.

Suggested Books for Further Studies

1. “Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott: A comprehensive guide covering all aspects of financial accounting and reporting.
2. “International Financial Reporting Standards (IFRS) 2019” by Wiley: Detailed explanations and insights on the latest IFRS standards.
3. “UK Accounting Standards” by Ernst & Young LLP: In-depth analysis and commentary on UK accounting standards, including historical perspectives of non-equity shares.

Accounting Basics: “Non-Equity Share” Fundamentals Quiz

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