From their original feature of preference in dividend distributions, preference shares have evolved significantly to the present time with a range of other rights granted to their holders. The classification of preference shares in financial reporting based on International Financial Reporting Standards (IFRS) varies depending on the rights of the preference shareholders and the obligations of the issuing entity. Some preference shares are classified as equity while some are classified as liability instruments, while others are considered compound instruments with both equity and liability components. There is no one classification that fits all. Nevertheless, one common feature is that preference shareholders have a priority claim over ordinary shareholders on the issuing entity’s distributable earnings and on net assets at the time of liquidation. However, they are subordinate to the claims of bonds and other types of debts. Their preferential rights over ordinary shares raise Shari'ah concerns about their classification and acceptability.
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