Definition
Under former UK accounting rules, a Non-Equity Share is a share in a company that exhibits certain characteristics restricting its claim to the company’s profits or assets. This includes:
- Limited rights to receive payments not based on the company’s assets or profits.
- Limited participation in surplus on liquidation, restricted to a specific amount.
- The share is redeemable under specified conditions.
This definition originates from Financial Reporting Standard (FRS) 4, Capital Instruments. In January 2005, FRS 4 was replaced by FRS 25, Financial Instruments: Disclosure and Presentation, under which the classification of preference shares as non-equity share capital ceased.
Types
Non-Equity Shares are generally categorized into two main types:
- Preference Shares: Often carrying fixed dividends, not contingent upon the company’s profits, and usually redeemable.
- Redeemable Shares: Shares that can be bought back by the issuing company either under specific conditions or at the holder’s request.
Characteristics of Non-Equity Shares
- Limited Rights to Payments: These shares have a fixed or capped payment mechanism, unlike common shares whose dividends fluctuate with company profits.
- Limited Liquidation Surplus Rights: On liquidation, non-equity shares entitle holders to a predefined return, independent of the total assets available.
- Redeemability: The ability of the issuer or the holder to redeem the shares adds an element of flexibility but restricts the permanence of the capital.
Importance
Understanding non-equity shares is crucial for:
- Investors: To evaluate the potential returns and risks associated with specific shares.
- Accountants and Auditors: To classify and report financial instruments accurately in compliance with applicable standards.
- Companies: To structure capital in a way that meets both regulatory requirements and strategic financial goals.
Applicability
Although the classification under FRS 4 is no longer applicable, the concept still influences financial decision-making and the structuring of company capital instruments under modern standards like IFRS.
- Equity Share: A share that represents ownership in the company and entitles the holder to a portion of profits.
- Preference Share: A share which carries preferential rights to dividends and assets over common shares.
- Redeemable Share: A share that can be repurchased by the company under certain conditions.