How do I account for increasing-rate preferred stock where the dividend escalates over time?

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AcadiFi · Accepted Answer

Increasing-rate preferred (IRPS) is preferred stock whose stated dividend rate steps up over specific periods according to a predetermined schedule. The scheduled escalation signals that the early low rate is effectively a discount the issuer is accepting, and economic substance says dividends should be smoothed.

Under US GAAP (ASC 505-10-S99-7) the issuer computes a constant effective rate over the period until perpetual dividends begin, then recognizes dividends at that constant rate. The difference between the effective rate and the stated rate accretes the preferred's carrying value.

Worked example — Cassowary Holdings issues $80M of IRPS: 2% in years 1-3, 9% perpetually after year 3. The constant effective yield (computed by discounting all future dividends plus the stated value back to proceeds) is roughly 6.8%.

- Year 1 cash dividend: 2% × $80M = $1.6M
- Year 1 effective dividend recognized in EPS denominator: 6.8% × $80M = $5.44M
- Accretion to preferred carrying value: $5.44M minus $1.6M = $3.84M credited to preferred, debited to retained earnings

On the income statement there is no P&L impact (these are still dividends, not interest), but EPS available to common shareholders is reduced by the full $5.44M each period.

Under IFRS, increasing-rate preferred typically gets similar economic treatment if classified as equity, but the exact mechanics of the 'deemed dividend' accrual are less prescriptive — you still disclose the escalation schedule and its effect on distributable equity.

How do I account for increasing-rate preferred stock where the dividend escalates over time?

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