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Chapter 12

1.2 Financial capital

The three main forms of financial capital you need to be aware of are:

Ordinary ‘equity’ share capital

This is equity as the directors have no obligation to pay a dividend.

Ordinary shares are classified within equity in the statement of financial position.

Loan notes

Under the terms of the loan notes the directors are required to pay the loan holder an
annual interest amount with the full debt repaid at a later date in time.

Loan notes are a form of debt and are classified as a liability in the statement of
financial positon. The interest payments are treated as a finance charge which is
shown as an expense on the statement of profit or loss.

Preference shares

Preference shares can either be debt or equity depending on their contractual terms.

If there is an obligation to repay (redeemable) then this is evidence of debt. This
would therefore be classified as a liability in the statement of financial position with
the dividends shown as finance charges in the statement of profit or loss.

If there is no obligation to repay (irredeemable) then this is evidence of equity. This
would therefore be classified as equity and dividends treated the same way as
ordinary dividends.

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