How is preferred stock reported differently under U.S. GAAP and IFRS? Do you think preferred stock is a liability or an equity item? Why?
What will be an ideal response?
The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be.
Under U.S. GAAP, preferred stock is usually recorded as stockholders' equity with dividends reported as a reduction of retained earnings. Under IFRS, most preferred stock is reported as debt with the dividends reported in the income statement as interest expense.
As we learned in Chapter 10, preferred stock has characteristics of both liabilities and stockholders' equity. Preferred stock can have characteristics nearly identical to bonds or characteristics nearly identical to common stock.
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