Why are redeemable preference shares classified as a liability?

Redeemable preference shares are classified as a liability due to the obligation they create for the company to repay the shareholders the redemption amount at a future date. This characteristic implies that the entity has a financial obligation similar to that of other liabilities, such as loans or bonds. When these shares are issued, the company is committing to repay the investors not just the face value of the shares, but potentially dividends as well, further reinforcing the nature of this financial commitment.

Other factors related to redeemable preference shares, such as whether they are convertible, the presence of a fixed interest rate, or their tradability, do not inherently determine their classification. While a fixed interest rate may indicate that they function similarly to debt in terms of cash flows, it is the obligation from redemption that primarily positions them as a liability on the balance sheet.