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FA3 Lesson 3. Shareholders’ Equity

FA3 Lesson 3. Shareholders’ Equity. Definitions Issuance of share capital Retirement of share capital Treasury stock Dividends Stock dividends and stock splits Cash flow statement considerations. 1. Definitions. Equity (or net assets )

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FA3 Lesson 3. Shareholders’ Equity

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  1. FA3Lesson 3. Shareholders’ Equity • Definitions • Issuance of share capital • Retirement of share capital • Treasury stock • Dividends • Stock dividends and stock splits • Cash flow statement considerations

  2. 1. Definitions Equity (or net assets) Ownership interests in the assets of a profit oriented enterprise after deducting its liabilities Common shares Represent residual ownership interest in the company Preferred shares Have some priority regarding dividends and/or assets upon dissolution

  3. 1. Definitions (continued) Issued share capital Shares that have been issued by the company Outstanding share capital Shares that are in the hands of investors; this may differ from issued share capital if the company is holding treasury stock (i. e., holding its own shares).

  4. 2. Issuance of share capital • When shares are issued, equity increases by fair value of assets received (valuation issues) • Non-monetary transactions: First, try to use fair value of shares to value transaction; if that does not work, fair value of consideration received; or an average of the two • Share issue costs: Can be deducted from share capital account (U. S. approach); or debited to retained earnings • Example: A14-1

  5. 3. Retirement of share capital “Gains” or “losses” on retirement of shares (difference between reacquisition cost paid for retired shares and book value) do not flow through the income statement: • “gains” create contributed capital • “losses” first reduce any contributed capital previously created, and then reduce retained earnings directly Example: A14-4

  6. 4. Treasury stock Treasury stock are issued shares of the company that have been repurchased and temporarily held by the company for: eventual retirement, distribution to company employees. • Treasury stock is a reduction in shareholders’ equity; it is not an asset • Treasury shares are not entitled to cash dividends Example: A14-9

  7. 5. Dividends Dividends are distributions of cash (usually) or other assets to shareholders. • Preferred shareholders generally have preference regarding dividends, i. e., preferred shareholders usually get their dividends before any dividends can be paid to common shareholders • Things get complicated if preferred shares are cumulative and/or participating Example: A14-13

  8. 6. Stock dividends and stock splits • Stock dividends are generally recorded as a debit to retained earnings and a credit to share capital (most common), or simply as a memo • Stock dividends are valued at fair value of shares (most common) or stated value • Stock dividends can give rise to fractional share rights • Stock split – only a memorandum note • Example: A14-17

  9. 7. Cash flow statement considerations Example: A14-31

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